OECD Economic Surveys: Portugal 2023

1. Key policy insights

COVID-19 and rising costs of living are threatening growth and well-being

Portugal has made impressive strides in raising living standards over recent years (Figure 1.1). Solid trend growth from 2013 up until the COVID-19 pandemic reflected the benefits of past structural reforms, strong export performance supported by favourable global economic conditions and solid domestic demand. Employment picked up and the unemployment rate fell from 17% in 2013 to 6% in 2022. Over the same period, the economy increased its reliance on renewable energy sources, such as wind power.

The economy weathered the COVID-19 pandemic reasonably well and is now coping effectively with the repercussions from Russia’s war of aggression against Ukraine. After the historically deep recession of 2020, the economy recovered rapidly in 2021-22 and unemployment declined quickly, supported by a sizeable policy response (Figure 1.1) (OECD, 2021[1]). Since then, Portugal has achieved one of the highest COVID-19 vaccination rates worldwide, particularly among the elderly, who are almost fully vaccinated. The war in Ukraine has affected the Portuguese economy through the slowdown in global demand, particularly in major European trading partners, and the surge in energy and food prices, but the government has put in place a wide set of measures to support households and firms.

Figure 1.1. The economic rebound has been strong

Source: OECD (2023), OECD Economic Outlook: Statistics and Projections (database); OECD (2023), Productivity database.

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At the same time, Portugal faces multiple challenges to sustain growth and improve well-being over the longer term, some of which have been exacerbated by the pandemic and the war in Ukraine. Productivity is low (Figure 1.2) and its growth has been modest. Low levels of investment, particularly in intangibles, low R&D intensity and low average skill levels remain key challenges, despite recent improvements with respect to workforce skills. In addition, parts of the population struggle to maintain a continuous attachment to the labour market and face heightened risk of poverty. Measures fostering the acquisition of skills relevant for a more digital and greener economy would likely boost participation and productivity, in addition to measures improving access to finance for innovative SMEs. Some public expenditures could be reallocated to more effective policies to enhance overall spending efficiency and growth.

Improvements in healthcare could also lead to sizeable benefits (Chapter 2). While measures of health sector performance are good overall and the system weathered the COVID-19 pandemic better than initially feared, access and quality of care have deteriorated. The health system is facing mounting spending pressures as the population is ageing rapidly (Figure 1.2), while a legacy of past underinvestment and the build-up of long waiting lists during the pandemic will need to be addressed over time.

Figure 1.2. Improving productivity and addressing population ageing are long-term challenges

1. Or latest available.

2. Share of the projected population over 65 in the total population.

Source: OECD (2023), OECD Compendium of Productivity Indicators; OECD (2023), Population statistics.

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In the face of these challenges, decisive policy action is needed to sustain improvements in living standards and put growth on a sustainable and resilient path. In light of the ageing and declining working-age population, future growth will hinge on productivity gains. The National Plan for Recovery and Resilience (Box 1.1) and the Portugal 2030 Strategy outline a set of investments and structural reforms in public administration, health and education, as well as competition meant to remove obstacles to growth and facilitate the financing of investments in faster, greener and more digitalised growth. The sizeable scale of planned spending, the broad scope of reforms, and the tight link between reforms and spending could boost potential growth by improving both investment and confidence. Successful implementation of these ambitious policy plans, however, will hinge on a more effective public administration. Reforming public finances with a view to improve spending efficiency could allow more growth- and equity-enhancing spending and ease the burden of the tax system on job creation.

Against this background, the key messages of this Survey are:

• High tax revenues during the recovery allowed the government to cushion the impact of Russia’s war of aggression against Ukraine but high inflation, and foreseeable fiscal pressures from population ageing will require a continuation of prudent fiscal policies, both in the short and medium term.

• Past underinvestment, low productivity and the ongoing green transition call for further efforts to boost productivity growth and for major investments. Reducing policy uncertainty and high transaction costs would accelerate and boost the impact of new investments, including those supported by the Recovery and Resilience Plan (RRP).

• The health sector is suffering from staff shortages, underinvestment and long waiting lists (Chapter 2). Moving towards a more integrated system of primary, community and hospital care offers solutions to improve quality of care and value for money.

Box 1.1. Portugal’s Recovery and Resilience Plan (RRP) and 2030 Strategy

Portugal’s Recovery and Resilience Plan (RRP), alongside the Portugal 2030 Strategy, is intended to foster a stronger post-COVID recovery, while making the economy more sustainable, resilient and better prepared for the green and digital transitions (EC, 2023[2]). The Portugal 2030 Strategy seeks to ensure the coherence of measures financed through the Multiannual Financial Framework 2021-27, the Recovery and Resilience Facility and other EU and national funds.

Portugal’s RRP currently includes 83 investment projects and 32 reforms (EC, 2023[2]). Portugal was initially set to receive EUR 16.6 billion or around 8% of 2019 GDP from the Recovery and Resilience Facility (RRF) between 2021 and 2026, including EUR 13.9 billion in grants and EUR 2.7 billion in loans (Ministério do Planeamento, 2021[3]; Recuperar Portugal, 2023[4]). On 26 May, Portugal submitted a request to the European Commission to modify its RRP and add a REPower EU chapter, proposing a further 49 investments and 11 reforms (EC, 2023[5]). This modification follows the upward revision of its maximum amount of grants to EUR 15.5 billion and REPower EU grants, totalling EUR 704 million. Portugal also requested EUR 3.2 billion in additional loans. These funds make the overall modified plan worth EUR 22.2 billion.

Investments and reforms to boost resilience focus on better supporting vulnerable people, strengthening investment, innovation and infrastructure, boosting qualifications and skills and supporting forest and water management. Key measures currently include:

• Strengthening the response capacity of the National Health Service (NHS), including a stronger role for primary care, upscaling long-term and mental healthcare, reforming the governance model of hospitals and boosting health digitalisation (EUR 1.4 billion).

• Increasing the supply of social and student housing (EUR 2.7 billion).

• Reinforcing the responsiveness of the education and training system (EUR 1.3 billion).

• Strengthening research and promoting innovation and investment (EUR 2.9 billion).

Investments and reforms to support the climate transition currently make up 38% of the RRP, which will be further strengthened in the forthcoming update to the RRP as a result of the REPowerEU programme. They focus on improving energy efficiency to reduce greenhouse gas (GHG) emissions, the dependence on fossil fuels and the share of households who are unable to afford the use of energy or to adequately heat their homes. Some key measures currently include:

• Improving the energy efficiency of buildings (EUR 610 million).

• Promoting sustainable mobility through extending the metro, constructing light rail, creating a bus rapid transit system and acquiring clean buses and charging stations (EUR 967 million).

• Strengthening decarbonisation, energy and resource efficiency and the use of alternative energy sources in industrial processes (EUR 715 million).

Key investments and reforms to support digitalisation make up 22% of the RRP. They focus on developing digital skills and the digitalisation of the public sector and small firms. Measures currently include:

• Modernising the computer systems of the NHS and enhancing the digitalisation of medical records (EUR 351 million).

• Supporting SMEs and their workers with tailored digital training, coaching and support to foster the adoption of digital technologies (EUR 650 million).

The European Commission estimates that the RRP could lift GDP by 1.5% to 2.4% by 2026 and create 50,000 jobs, not including the impact of the planned structural reforms (EC, 2021[6]). Spill overs from the RRP’s of other EU countries are expected to boost Portugal’s GDP by a further 0.5% by 2026.

The timeline of the RRP is ambitious and supply-side disruptions and inflationary pressures are adding to existing challenges. Though Portugal received the second RRP instalment on 8 February 2023, spending rates should accelerate to maximise the potential benefits.

Source: EC (2021[6]), Analysis of the recovery and resilience plan of Portugal; EC (2023[2]), Portugal’s recovery and resilience plan; EC (2023[5]), NextGenerationEU: Portugal submits request to revise recovery and resilience plan and add a REPower EU chapter; Ministério do Planeamento (2021[3]), Recuperar Portugal, Construindo o futuro – Plano de Recuperação e Resiliência; Recuperar Portugal (2023[4]), Recovery and Resilience Plan, https://recuperarportugal.gov.pt.

High uncertainties have dented the pace of the recovery

Growth has slowed amid tighter financial conditions and high uncertainty

Following the sharp rebound in real GDP over 2021 and early 2022, growth is projected to ease to 2.5% in 2023 and 1.5% in 2024 (Table 1.2). As the rebound in consumption and tourism began to fade over 2022, Russia’s war of aggression against Ukraine, the slowing global economy, high energy and food prices, uncertainty and rising interest rates started to weigh on activity. Historically high employment rates, rising wage growth, government support measures and excess savings are providing some support to households. Nevertheless, consumer confidence remains low, although it has picked up from its end-2022 trough (Figure 1.3, Panel A). Consumption growth is projected to remain subdued, as job creation slows, high inflation dents purchasing power and monetary and financial conditions tighten further, despite some offset from energy support measures and rising wages. Both consumption and housing demand are expected to slow as higher interest rates translate into rising mortgage payments, with around 89% of housing loans subject to variable interest rates.

Firms will continue to face challenging business conditions amid high production costs, although supply bottlenecks appear to be easing. These conditions have hurt business confidence (Figure 1.3, Panel A), particularly in construction and industry. Confidence in the services and retail sectors has increased over 2023, as strengthening external demand continues to support exports, particularly of services. Export growth is expected to continue, although at a more moderate pace. As tighter financial conditions and heightened uncertainty weigh on private investment, EU funds are expected to boost to public investment (Panel B). While the Recovery and Resilience Plan (RRP) provides a unique opportunity to raise investment and productivity growth, implementation should accelerate to maximise the potential benefits.

Figure 1.3. Confidence appears to have bottomed out and public investment is supporting activity

1. Current expenditures includes government final consumption, social security benefits, property income and other outlays.

Source: OECD Main Economic Indicators database; OECD (2023), OECD Economic Outlook: Statistics and Projections (database).

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Fiscal policy is providing significant support to households and firms to cushion the inflation shock, with policy support estimated to total 1.9% of GDP in 2022 and 3.7% in 2023. Measures include one-off cash transfers to households, an increase in pension payments, temporary cuts in VAT on basic foodstuffs and lower prices for energy and public transport (Box 1.2). To maintain strong incentives for energy savings and the green transition, it will be important to increasingly target support to the most vulnerable households and phase out energy support measures (OECD, 2022[7]; 2022[8]; 2023[9]).

Box 1.2. Fiscal support to alleviate the effects of the inflation shock

The government has been supporting households and firms in the face of rising prices since late 2021 (Table 1.1). Over 2022 and 2023, the fiscal cost of energy support measures is amongst the highest in the OECD (OECD, 2023[10]).

Income support includes one-off transfers, some of which targeted to the lowest income deciles (Bank of Portugal, 2022[11]). For example, the first two of three payments to low-income households in 2022 largely supported the lowest income decile, with smaller benefits up to the fourth-lowest income decile. However, the support to adults earning less than EUR 2700 per month ended up supporting incomes across the income distribution (Bank of Portugal, 2022[11]). Untargeted price measures are also supporting households and firms. One such measure is the cap on housing rent increases in 2023 at 2%, with full compensation to landlords through reduced personal income taxes in 2024, estimated at EUR 45 million (Governo da República Portuguesa, 2022[12]).

Table 1.1. Government measures to support against rising prices

	2022		2023
	Million EUR	% of GDP	Million EUR	% of GDP
One-off cash payments to households	2200	0.9	580	0.2
Reduction in the energy products tax (ISP), including reduction equivalent to a decrease of the VAT rate from 23% to 13% and delayed increase in the carbon tax	1485	0.6	385	0.1
Reduction of the VAT rate on electricity from 13% to 6%	20	0.0	67	0.0
Fuel subsidies for public transport and price freezes on consumer prices	75	0.0	66	0.0
Extraordinary electricity support to firms			2500	0.9
Rebate on gas consumption for high-usage firms (over 10 000m³ annually)			1000	0.4
Gas support to companies in high-usage industries	235	0.1
Revision of income tax brackets			560	0.2
General increase in pensions			1820	0.7
Inflation-related increase in wages for civil servants			1060	0.4
Elimination of VAT on basic foodstuffs from mid-April to October 2023			410	0.2
Support for rent and interest payments for low-income households under the More Housing programme			450	0.2
Other measures	420	0.2	964	0.4
Total measures	4435	1.9	9862	3.7

Source: Bank of Portugal (2022[11]), Economic Bulletin, December; Governo da República Portuguesa (2022[13]), Novas medidas para compensar aumento dos preços da energia; Governo da República Portuguesa (2022[12]), Famílias Primeiro - perguntas e respostas; Governo da República Portuguesa (2022[14]), Novo apoio extraordinário de 240 euros abrange um milhão de famílias; Governo da República Portuguesa (2022[15]), Empresas vão ser apoiadas em mil milhões de euros na aquisição de gás e 2500 milhões de euros na de eletricidade; Governo da República Portuguesa (2022[16]), State Budget 2023; Governo da República Portuguesa (2023[17]), Stability Program 2023-2027; OECD (2023[18]), OECD Economic Outlook, Volume 2023 Issue 1, OECD Publishing, Paris.

The implementation of the RRP, in conjunction with the Multiannual Financial Framework 2021-27 and other EU and national funds, will boost investment and spur productivity growth (Box 1.1). Spending from RRP grants was projected to increase from 0.3% of GDP in 2022, to 1.5% of GDP in 2023 and 1.3% of GDP in 2024. This will help offset the slowdown in 2023 while boosting green infrastructure, energy efficiency and the capacity to generate renewable energy. However, designing, approving and implementing programmes is challenging, and an acceleration of the implementation is important. Ensuring coherence between the RRP and operational programmes of the EU cohesion policy will be a key factor of success. While Portugal has absorbed a higher share of allocated structural funds than the average EU country over 2014- 20, future delays could be minimised by continuing to develop administrative capacities and streamlining the public procurement system. Public procurement practices still have room for improvement in the areas of competition and transparency (OECD, 2021[1]). The take-up of the simplified rules in place since 2021 and that have been extended to 2026 to speed up procedures has increased, but information on awarded contracts is partly lacking (Tribunal de Contas, 2022[19]; CIMEC, 2022[20]), as well as for procurement contracts under the general procedure (EC, 2022[21]). Contracting authorities should ensure that procedures launched under the new simplified procedures meet high levels of transparency and accountability to raise competition and prevent the risk of fraud (Tribunal de Contas, 2022[19]).

The labour market remains robust, even as the unemployment rate is projected to continue to increase over 2023-24. Participation and employment rates remain around the historical highs reached over 2022 (Figure 1.4, Panel A), including for women, whose employment rate was around 7 percentage points higher than the OECD average. The unemployment rate increased in end-2022 and early 2023 from its lowest rate in over two decades, alongside slowing growth (Figure 1.4, Panel B). The recovery in labour-market opportunities for young people has been slower, with the unemployment rate among those aged 15-24 only returning to pre-pandemic levels during 2022, following a particularly strong increase in 2020. Growth in the annual nominal wage rate increased to 5.7% in 2022, slightly lagging headline inflation, and is projected to reach 8.7% in 2023 and 3.5% in 2024. Alongside by strong, although easing growth in employment, real disposable income increased by 2.9% in 2022, and is projected to increase to 4.3% and 0.8% in 2023 and 2024. Measures under the 2022 Medium-Term Agreement on improving incomes, wages and competitiveness are likely to support household income, including through the increase in the minimum wage by 8% in 2023 and tax incentives for firms to raise wages (Box 1.7). A regular evaluation of these policies, including of their effects on employment and wage inequality, would help to ensure their effectiveness (see below).

Figure 1.4. Labour market performance has continued to improve

1. Long-term unemployment refers to those who have been unemployed for 12 months and more.

Source: OECD Labour Force Statistics (database); and Eurostat, Labour Force Statistics (database).

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Table 1.2. Macroeconomic indicators and projections

	2019	2020	2021	2022	2023	2024
	Current prices (billion EUR)
Gross domestic product (GDP)	214.4	-8.3	5.5	6.7	2.5	1.5
Private consumption	137.3	-7.0	4.7	5.8	0.6	1.0
Government consumption	36.4	0.3	4.6	1.7	2.6	1.2
Gross fixed capital formation	38.8	-2.2	8.7	3.1	3.1	4.2
Housing investment	6.9	-6.9	12.2	3.6	-8.9	-0.7
Final domestic demand	212.6	-4.9	5.4	4.5	1.5	1.7
Stockbuilding1	0.8	-0.5	0.3	0.1	-1.0	0.0
Total domestic demand	213.4	-5.3	5.6	4.5	0.5	1.7
Exports of goods and services	93.3	-18.6	13.4	16.6	8.0	2.6
Imports of goods and services	92.3	-11.8	13.2	11.1	3.5	3.0
Net exports1	1.0	-3.0	-0.2	2.0	2.2	-0.1
Other indicators (growth rates, unless specified)
Potential GDP	. .	1.9	2.0	1.8	1.6	1.6
Output gap2	. .	-9.1	-6.0	-1.5	-0.5	-0.6
Employment	. .	-1.9	2.7	2.0	0.5	0.4
Unemployment rate	. .	7.0	6.6	6.0	7.4	7.5
GDP deflator	. .	2.0	1.5	4.4	8.0	3.4
Consumer price index	. .	-0.1	0.9	8.1	5.7	3.3
Core consumer price index	. .	-0.2	0.2	5.0	4.7	3.4
Household saving ratio, net3	. .	3.3	1.3	-1.5	2.0	1.8
Current account balance4	. .	-1.0	-0.8	-1.3	2.9	3.4
General government fiscal balance4	. .	-5.8	-2.9	-0.4	-0.1	-0.1
Underlying general government fiscal balance2	. .	0.6	-0.5	0.0	-1.0	-1.0
Underlying government primary fiscal balance2	. .	3.1	1.6	1.8	1.0	1.5
General government gross debt (Maastricht)4	. .	134.9	125.4	113.9	106.2	102.9
General government net debt4	. .	112.7	104.2	79.9	72.3	68.9
Three-month money market rate, average	. .	-0.4	-0.5	0.3	3.2	3.4
Ten-year government bond yield, average	. .	0.4	0.3	2.2	3.6	3.9

Note: 1. Contribution to changes in real GDP.

1. As a percentage of potential GDP.

2. As a percentage of household disposable income.

3. As a percentage of GDP.

Source: OECD (2023), OECD Economic Outlook: Statistics and Projections (database) with projections from "OECD Economic Outlook No. 113", June.

High energy and food prices and the quick rebound in services sector activity pushed headline consumer price inflation to a peak of 10.6% in October 2022, which declined to 6.9% in April 2023 following a downturn in energy prices (Figure 1.5). Over 2022, increases in energy prices made a smaller contribution to inflation in Portugal than in many other European countries. This reflects a relatively higher share of renewable energy sources, various measures to reduce wholesale prices in the Iberian electricity market and temporary tax reductions, including for VAT on electricity and the energy products tax (ISP), which covers most energy demand including fossil fuels, electricity and heat. Yet, the drought and the rebound in tourism pushed food inflation significantly higher than the euro area average, while services prices rose quickly with the reopening of the economy and the recovery in tourism (Panel B). Looking ahead, inflation is projected to moderate to 5.7% in 2023 and 3.3% in 2024 as tighter monetary policy curbs inflationary pressures and food prices stabilise (Panel C). Inflation expectations have also declined from their 2022 peak (Panel D).

Figure 1.5. Inflation is high

1. Contributions to annual inflation of each component.

2. Inflation expectations are obtained from business and consumers opinion surveys, from responses to the question on price expectation for the next 3 months for businesses, and for the next 12 months for consumers. Data are expressed in balance between weighted percentages of positive and negative replies.

Source: OECD, Consumer Price Indices (database); OECD Economic Outlook: Statistics and Projections (database); and INE, Business and consumer surveys.

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The balance of risks is to the downside

Significant uncertainty about economic prospects remains, and the major risks are on the downside, affecting both firms and households. Like in other OECD countries, businesses have been hit by two shocks in a row, as the pandemic was immediately followed by the war in Ukraine and increasing price pressures. High input costs, including for energy, are stretching thin financial buffers and some firms will face liquidity and solvency challenges that could potentially lead them into bankruptcy. Households are facing increasing debt-servicing costs that may become difficult to meet, while the risk of a decline in house prices would further weigh on consumer sentiment and residential investment. However, the effect on banks will likely be cushioned by relatively sound residential mortgage loan portfolios (see below). Moreover, direct macroeconomic risks from Russia’s war against Ukraine are limited, as Portugal’s goods trade with Russia and Ukraine is modest.

The risk of energy supply shortages appears to have receded across Europe and risks in Portugal appear less severe than in other European countries. Portugal imports liquified petroleum gas via ship and has significant LNG port capacity and gas storage was at 95.5% of capacity in early March 2023 (GIE AGSI, 2023[22]). Moreover, around 58% of electricity came from renewable sources in 2021 (OECD, 2022[23]). The forthcoming revision of the RRP, including the chapter on the REPowerEU plan, is planned to lower energy dependency over the medium term, including through further boosting energy efficiency and supporting the production of renewable energy and the decarbonisation of industry and public transport. If RRP spending were implemented more slowly than projected, this would constrain investment and the green transition. On the other hand, if wages increase by more than projected, it would boost consumption, although it would also fuel inflation.

Portugal’s export performance has been strong since 2007 (Figure 1.6, Panel A), but a more significant slowdown among Portugal’s main trading partners is a risk to export growth. Exports have been particularly susceptible to economic developments in euro-area trading partners, where growth has softened. Both goods and services exports fell sharply in 2020, before recovering to their pre-pandemic level over 2022 and continuing to grow at a robust pace (Figure 1.6, Panel B). The tourism sector accounted for around half of all services exports in 2019 (Figure 1.7) and tourists from abroad accounted for around 71% of nights spent in tourist accommodation (OECD, 2023[24]). Finally, a number of large potential shocks could also alter the economic outlook (Table 1.3).

Figure 1.6. Exports fell sharply during the pandemic but export performance remains strong

1. Difference between export growth and export markets’ growth, in volume terms (based on export markets as of 2015).

2. Proxied by the nights spent at accommodation establishments by foreign nationals.

Source: OECD (2023), OECD Economic Outlook: Statistics and Projections (database).

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Table 1.3. Low-probability events that could lead to major changes in the outlook

Shock	Possible impact	Policy response options
Escalating trade tensions.	Some exporters could face difficulties in accessing key markets.	Help affected companies identify new market opportunities.
Outbreak of a new vaccine-resistant COVID variant.	New waves of infections could lead to the reimplementation of measures to contain the spread of the virus, limiting people’s movement and ability or desire to travel. Confidence would fall, lowering domestic consumption, and tourism activity would decline.	Closely monitor health developments and continue to encourage vaccination, including booster shots. Keep contingency plans for moving to online work. Continue to develop digital tools to be able to limit interactions. Maintain stocks of personal protective equipment.
A significant increase in risk premiums due to a deterioration in macro-economic conditions and heightened financial market volatility.	Higher risk premiums would increase interest rates on the issuance of sovereign debt, raise market financing costs for firms and could affect the quality of assets in bank portfolios.	Continue the focus on fiscal consolidation to lower debt. Continue to develop non-bank sources of financing to diversify risks. Ensure that banks have adequate capital buffers.

Figure 1.7. Portugal’s export structure

Share of exports by sector and destination, 2019

Note: In Panel C, Others include beverages and tobacco, animal and vegetable oils, and commodities and transactions. In Panel D, Others include financial services, insurance and pension, and cultural services.

Source: OECD International Trade Statistics.

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Financial risks will require close monitoring

The resilience of Portugal’s financial system has been strengthened significantly since 2007 (Figure 1.8). Financial soundness indicators show continuous improvements since the onset of the sovereign debt crisis in 2010 and the credit ratings of major Portuguese banks have improved over recent years. Non-performing loans (NPLs) have declined sizably, to 3.0% of all outstanding loans and 1.3% net of impairments in 2022Q4 yet remain above the OECD and euro area averages (Figure 1.9, Panels A and B). Liquidity and capital ratios have improved, although capital ratios remain below the OECD average and should further increase in light of potential future challenges (Panels C and D). Prudence with respect to dividend distributions and share buybacks would be one possible step in this direction. Banks’ funding structure has become more stable, with the share from customer deposits increasing to around 70% of bank liabilities in mid-2022, helping to mitigate high market volatility. Rising interest rates are leading to greater net interest income for banks, and alongside greater operating cost efficiency, are boosting bank profitability. At the same time, rising interest rates are also the most salient financial stability risk. Credit default risks may well increase as higher policy rates trickle down into lending rates, compounded by rising energy and input prices that are reducing households’ disposable income and firms’ profit margins. Banks remain vulnerable to potential swings in sovereign spreads and investor confidence in the sustainability of Portuguese public finances, as Portuguese sovereign debt securities accounted for 5.7% of the banking system’s assets in early 2023, higher than the 2.7% euro area average (ECB, 2023[25]).

Figure 1.8. Macro-financial vulnerabilities have declined with the exception of the housing market

Index scale of -1 to 1 from lowest to greatest potential vulnerability, where 0 refers to long-term average

1. Each aggregate macro-financial vulnerability dimension is calculated by aggregating (simple average) normalised individual indicators from the OECD Resilience Database. Individual indicators are normalised to range between -1 and 1, where -1 to 0 represents deviations from long-term average resulting in less vulnerability, 0 refers to long-term average and 0 to 1 refers to deviations from long-term average resulting in more vulnerability. Financial dimension includes: regulatory capital ratio, regulatory Tier 1 capital ratio and the return on equity ratio. Non-financial dimension includes: private bank credit (% of GDP), household credit (% of GDP) and corporate credit (% of GDP). The asset market dimension includes: growth in real house prices (year-on-year % change), house price to disposable income ratio and house price to rent ratio. Fiscal dimension includes: government budget balance (% of GDP) (inverted) and government gross debt (% of GDP). External dimension includes: current account balance (% of GDP) (inverted) and real effective exchange rate (REER) (relative consumer prices).

Source: Calculations based on OECD (2023), OECD Resilience Database, June.

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For loans to households, which accounted for 63% of bank loan portfolios and of which 78% consist of mortgages (Bank of Portugal, 2022[26]), higher interest rates have rapidly raised mortgage payments. In January 2023, 89% of the stock of housing loans was subject to variable interest rates, almost all of which with rates indexed to EURIBOR for up to and including one year. Around 85% of these will have had their interest rate revised by June 2023, relative to the low interest rates prevailing in early 2022 (Bank of Portugal, 2023[27]). While more households are now taking out loans with fixed rates, 68% of new housing loans are being issued with variable rates, compared to 15% in the euro area (Figure 1.10, Panel D). Increases in interest rates and subdued real household incomes are starting to affect households’ ability to service their debts and may diminish the quality of mortgage loan portfolios. Average monthly mortgage payments have increased from EUR 254 in January 2022 to EUR 299 in December 2022 (INE, 2023[28]). By the end of 2023, around 11% of households with outstanding mortgages are estimated to have a loan-service-to-income ratio over 40%, compared to 5% in June 2022 (Bank of Portugal, 2022[29]). In the face of increasing risks, banks tightened credit standards on new housing loans over 2022 (Bank of Portugal, 2022[29]).

Risks associated with rising debt service costs are mitigated by the improved financial situation of households over the past decade (Figure 1.10, Panel C) and the low unemployment rate. The Government has also introduced policy measures to improve access to housing and lower debt repayments for low-income households (Box 1.3). Gross household debt as a share of gross disposable income has fallen to 90% in 2022, a decline of around 29 percentage points since 2013 (Figure 1.10, Panel C). Loan portfolios are mostly healthy, with loan-to-value (LTV) ratios at or below 80% for 93% of total mortgage loans in June 2022. Additional macroprudential measures implemented by the Bank of Portugal in 2018 introduced limits on LTV and debt service-to-income ratios, which has reduced the risk profile of borrowers (Bank of Portugal, 2022[26]; 2022[29]). Measures were further amended in 2022 by limits on the maximum maturity of mortgage loans.

Figure 1.9. The resilience of the banking sector has improved

Source: Banco de Portugal (2023), BPstat Database and IMF (2023), Financial Soundness Indicators, and ECB (2023), Statistical Data Warehouse, European Central Bank.

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House prices have increased rapidly in recent years and have reached high levels compared to incomes (Figure 1.10, Panels A and B). This is in part due to the increasing share of non-resident buyers in the Portuguese real estate market, which amount to around 12% of the transactions’ value, but significantly more in the Algarve region, Lisbon and Porto (Bank of Portugal, 2022[29]). However, the projected loss in real household income and the expectation of a continued increase in interest rates will tend to lead to lower demand for housing by residents. While in the short term, the risk of a sharp decline in house prices is likely to be limited by tight supply constraints and continued demand from non-residents, the housing market is a key risk to the financial system and requires careful monitoring (Figure 1.8). In line with the strengthened legal and regulatory framework for managing credit at risk of default or overdue, obliging credit institutions to adopt a more proactive approach (Bank of Portugal, 2022[29]), banks should continue to identify and present solutions to prevent household credit default. This could include the renegotiation and restructuring of credit contracts to adapt loan conditions to borrowers’ ability to service their debt. Adults’ financial knowledge appeared low in 2020 (OECD, 2020[30]) and in the longer term, further efforts to improve financial literacy could help to limit financial risks for households, as planned in Portugal’s ambitious long-term strategy to raise financial literacy (OECD, 2022[31]).

Figure 1.10. Housing market vulnerabilities remain high

1. 2022 for the euro area, Portugal and the Slovak Republic.

Source: OECD Analytical House Prices Indicators (database); Eurostat, National Accounts (database); OECD (2023) Economic outlook and ECB, Statistical Data Warehouse.

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The financial situation of firms, which account for around 36% of banks’ loan portfolio (Bank of Portugal, 2022[29]), has improved over the past decade, and this provides a greater buffer for firms to face the current challenging macroeconomic conditions. At the onset of the pandemic, policy measures helped to mitigate financial stress for firms, including a moratorium on bank loan repayments, guaranteed credit lines, tax relief and extended deadlines for tax payments (OECD, 2021[1]). After a temporary increase in 2020-21, corporate debt declined to its 2019 level in mid-2022 (Figure 1.11, Panel A) and the coverage ratio of corporate debt service costs was above its 2019 value. Insolvencies remain lower than in 2019, although filings remain incomplete as mandatory insolvency filings for debtors unable to meet credit obligations remain suspended, even though the moratorium on bank loans was phased out in September 2021 (Bank of Portugal, 2022[29]).

Risks surrounding corporate loan portfolios are likely to rise in the future as higher interest rates quickly increase financing costs, adding to the financial challenges resulting from the pandemic and the rise in energy and other input costs. Around 70% of firm debt was on floating rates in 2022 and an additional 15% was fixed at a maturity of less than 12 months (Bank of Portugal, 2022[29]). While firms’ profit margins have increased since 2020, they have been low over the past five years relative to the previous decade, which may limit firms’ ability to absorb increasing costs (Figure 1.11, Panel B). Input cost pressures could also further reduce profit margins, particularly for those firms most exposed to price increases in energy or raw materials. The Bank of Portugal estimates that in 2023 the proportion of vulnerable firms will increase to around one in four, only slightly below the levels reached during the sovereign debt crisis (Bank of Portugal, 2022[29]). These developments should continue to be closely monitored. Portugal could also consider adopting a mechanism to review inbound foreign investment with the objective of safeguarding national security goals.

Box 1.3. Recent developments in housing policies

The More Housing (Mais Habitação) programme is expected to be approved mid- 2023. The programme is based around five pillars, including:

• Increasing the supply of residential property by reclassifying land or commercial property for residential use and making state property available for development as affordable housing.

• Simplifying licensing procedures by shifting the licensing responsibility of specialty projects from municipalities to designers and introducing a financial penalty on public entities for not meeting legal licensing deadlines.

• Increasing the supply of houses for rent. Some measures aim to increase landlord’s confidence, such as through the state rent-to-sublet scheme and state guarantee in the case of a tenant’s default. Others aim to increase the state supply of rental housing through exempting the capital gains tax on property sales to the state. Lastly, some measures promote affordable rent by providing a credit line to municipalities to carry out coercive works, the compulsory letting of certain vacant houses; and increasing tax exemptions for affordable rents and longer-duration leases.

• Combatting speculation by ending golden visas and regulating rental growth.

• Supporting households by exempting the capital gains tax on housing sales for loan repayments; requiring banks to offer fixed-rate mortgages; and subsidising interest repayments and rents of low-income households.

Source: Governo da República Portuguesa (2023[32]), Mais Habitação.

Figure 1.11. Vulnerabilities of non-financial corporations remain high

1. Average of the OECD countries for which data is available.

Source: BIS, Credit Statistics (database); Eurostat (2023), National Accounts (database).

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Table 1.4. Past OECD recommendations to address financial risks

Recommendations in past surveys	Actions taken since 2021
Strengthen incentives for banks to reduce their non-performing loans should they prove insufficient. Consider establishing a national asset management company.	Non-performing loans continued to decrease over 2022. No action taken.
Develop equity markets to diversify financing sources, for instance by establishing equity funds. Improve awareness of entrepreneurs on equity instruments tools.	The Securities Code Act was revised, simplifying and reducing some regulatory burdens and barriers and increasing alignment with European legislation. The Portuguese Securities Market Commission (CMVM) has promoted initiatives, including the Issuer’s Guide online resource and Via the Market communication channel.

Strengthening macroeconomic fundamentals for a sustainable recovery

Ensuring fiscal sustainability

Like in all OECD countries, the COVID-19 crisis triggered a deterioration of public finances in Portugal, widening the fiscal deficit to 5.8% of GDP in 2020. Since then, the deficit has progressively declined to 2.9% of GDP 2021 and 0.4% in 2022 (Figure 1.12, Panel A). After a steady trend decline over 2011-19, public debt increased in 2020, but fell back to its pre-COVID-19 level in 2022. In 2022, the significant support measures linked to surging inflation were compensated by the phasing out of the COVID-19 measures, and by buoyant revenues stemming from the economic rebound and higher-than-expected inflation.

Current fiscal plans are projected to result in a continuous improvement in headline fiscal results over 2023-24. Nonetheless, public debt will remain at high levels in historical comparison and as an open economy, Portugal will remain exposed to external shocks (Figure 1.12, Panel B). The planned fiscal easing of 0.8% of GDP in 2023 aims to strike a balance between providing necessary support without adding to inflation. The general increase in pensions (0.7% of GDP), as well as the increase in wages for civil servants (0.4% of GDP), and the prolonged emergency measures in response to high inflation will raise current spending. On the revenue side, grants from the Recovery and Resilience Facility are set to provide funding of about 1.5% of GDP in 2023, while the adjustment of the personal income tax brackets and new investment incentives in the corporate income tax will lead to a (minor) reduction in 2024 income taxes.

Fiscal risks have grown due to large increases in contingent liabilities and the rise in energy and commodity prices, as well as disruptions to global value chains and tighter financing conditions. The impact of the pandemic pushed government guarantees to non-financial-corporations to 6.4% of GDP in 2020 and liabilities linked to State-Owned Enterprises (SOEs) and Public-Private Partnerships (PPPs) to 40.5% of GDP (Eurostat, 2022[33]). Government guarantees were rightly directed to firms with good pre-crisis creditworthiness in the most affected sectors (Bank of Portugal, 2022[29]). Nevertheless, these off-balance-sheet liabilities are vulnerable to potential corporate defaults, and the fiscal impact of executing the guarantees could be large (Tribunal de Contas, 2022[34]). In the same vein, capital injections in private companies, like for instance in the national aviation company TAP, could become a drag on fiscal accounts if the supported firms do not recover (OECD, 2021[1]).

Figure 1.12. The budget position is projected to improve in the short term

Source: OECD (2023), OECD Economic Outlook: Statistics and Projections (database).

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Demographic changes will further weigh on public finances in the coming decades. According to the baseline scenario of the European Commission’s Ageing report, ageing-related expenditures are set to rise by 2.7% of GDP by 2040, with half of the increase coming from health and long-term care, before declining thereafter (Table 1.5; Chapter 2). Despite an automatic link between the retirement age and life expectancy, pension expenditures will also rise in the medium term (see below). Sizable efforts will therefore be required to maintain Portugal’s public debt on a firmly declining path. In the absence of structural reforms to increase spending efficiency and curb the projected rise in expenditures, ageing could push the debt level significantly upwards by 2060 (Figure 1.13). By contrast, gradual fiscal consolidation combined with policies to foster GDP growth would keep public debt on a firmly declining path (Box 1.5 and Box 1.6). Although clouded by significant uncertainty, these debt simulations appear broadly in line with recent analyses by the Portuguese fiscal council (CFP, 2021[35]) and the European Commission (EC, 2022[36]).

Table 1.5. Ageing-related spending is projected to increase substantially

As a percentage of GDP unless otherwise indicated

	2019	2025	2030	2040	2050	2060	2070
Public pensions expenditure, gross1	12.7	13.3	14.2	14.4	12.6	10.5	9.5
of which:
Old-age and early pensions	10.4	10.9	11.7	11.7	10.2	8.4	7.8
Disability pensions	0.5	0.5	0.5	0.6	0.5	0.5	0.6
Survivors pensions	1.6	1.7	1.8	1.9	1.8	1.5	1.1
Public spending on healthcare2	5.7	6	6.3	6.8	7.2	7.4	7.3
Public spending on long-term care2	0.4	0.5	0.5	0.6	0.8	0.9	0.8
Education	4.3	3.9	3.8	4	4.2	4.1	4.1
Total ageing-related spending	23.1	23.7	24.8	25.8	24.8	22.9	21.8
Old-age dependency ratio (20-64)	37.3	41.9	47.2	59.6	68.8	67.9	67.3
Life expectancy at 653	18.4	18.9	19.4	20.4	21.4	22.3	23.2

Note: 1. AWG baseline scenario, 2. AWG Reference scenario. 3. Males.

Source: EC (2021), The 2021 Ageing Report: Economic and Budgetary Projections for the EU Member States (2019-2070).

Figure 1.13. Structural reforms will help keep public debt on a declining path

1. This scenario includes the costs of ageing as described in European Commission Table III.1.137 (2021). As a result, the primary balance deteriorates by 1.2% of GDP on average over 2025-60, compared to the key assumptions in Panel B.

2. The public debt path in scenario B is based on the assumptions in Panel B. These assumptions are taken from the long-term model described in Guillemette and Turner (2021). In the model, the rise in spending related to ageing is offset in full, and the primary deficit develops endogenously and stabilises public debt in the long term at 2021 levels.

3. The “OECD-recommended reforms” scenario adds the estimated effects of the reforms recommended in this Survey (Boxes 1.4 and 1.5). This scenario assumes an increase of the primary balance of 0.6 percentage point of GDP by 2028.

Source: Adapted from OECD (2023), OECD Economic Outlook: Statistics and Projections (database), June; and EC (2021), “The 2021 Ageing Report: Economic and budgetary projections for the EU Member States (2019-2070)” Directorate General for Economic and Financial Affairs.

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In this context, Portugal should strengthen its fiscal strategy to keep debt on a declining path over the medium term in line with EU fiscal rules. The government plans to achieve a primary surplus of 2.9% of GDP by 2027 on the back of the economic recovery, the gradual phase-out of emergency support measures and the containment of public spending (Portuguese Ministry of Finance, 2023[37]). In the short term, fiscal support should become more targeted to mitigate the impact on vulnerable households while gradually phasing out support. At the same time, the strategy needs to contain escape clauses to avoid that maintaining targets despite slower growth leads to a pro-cyclical fiscal stance. In the medium term, in order to set the debt-to-GDP ratio on a sustainable path and increase the efficiency of public spending, it is necessary to better identify the costs and benefits of each public policy while improving the budgetary process (OECD, 2019[38]; 2021[1]; Tribunal de Contas, 2022[34]). This should be centred on stronger financial management, reducing tax expenditures, containing pension expenditures and increasing public spending efficiency, notably in the health sector (Chapter 2), to help rebuild fiscal room for much-needed investment after the European funds end.

Moving towards a performance-oriented and transparent budget framework

Strengthening the fiscal framework

Improving the budgetary framework and ensuring its effective implementation is key for the sustainability of public debt and the efficiency of public spending. The implementation of the 2015 Budgetary Framework Law (BFL) – which has experienced systematic delays since its adoption – has a clear potential to strengthen overall budgetary planning and monitoring, through a stronger medium-term focus and enhanced transparency (OECD, 2021[1]; Tribunal de Contas, 2022[34]). In particular, the development of the foreseen new accrual-based public accounting system by all government sectors and bodies is still outstanding (Tribunal de Contas, 2022[39]). A number of measures contained in the BFL are being gradually implemented, and the 2022 amendments to the Budgetary Framework Law will aim to improve the ex-post evaluation of macroeconomic forecasts and the role of the Portuguese fiscal council (IMF, 2022[40]). Yet, more needs to be done to strengthen expenditure control, cost-efficiency, and appropriate budgeting to prioritise growth-enhancing expenditures and facilitate the rechannelling of public resources to strategic priorities, such as ensuring a better functioning of the health system (Chapter 2) and delivering on the green and digital transitions.

Portugal should take stock of overall public expenditure and systematically reassess the strategic importance of spending items for policy priorities. In recent years, social expenditures have increased rapidly, while investment, notably in infrastructure, education and health has lagged behind (Figure 1.14). Rationalising public expenditures and improving their efficiency will require regular spending reviews and evaluations. A major first step would be to establish coordinating entities in each ministry in charge of budget execution, as recommended in past Surveys. This would provide them with guidelines for setting programme objectives and assessments of targets (OECD, 2018[41]) and free up resources in the Ministry of Finance for the analysis of the financial performance of programmes and for establishing regular and systematic spending reviews. Indeed, the spending review launched in 2016 (revisão da despesa) did not lead to quantified savings and lacked monitoring (CFP, 2021[35]). Broadening the collection of performance information and developing evaluation capacity is a necessary condition for the success of future spending reviews. Performance information is unevenly collected and data are not sufficiently used as a strategic asset to serve citizens (OECD, 2021[1]). A renewed and improved spending review, focusing in particular on social benefits, healthcare costs, and controlling pensions and public sector wages, could help to identify areas for potential savings, and support prioritisation, as in Canada and the United Kingdom (Box 1.4). Regular evaluations of their effects would be key to ensure the efficiency of these reviews (Tryggvadottir, 2022[42]).

Strengthening medium-term budgeting would also help define concrete actions to achieve fiscal objectives by subsectors and policy areas. In Portugal, medium-term fiscal plans are not binding, temporarily due to a transitional rule of the Budgetary Framework Law, and deviations from plans within a year were frequent even before the pandemic (OECD, 2021[1]). The multi-annual framework still has several weaknesses with regard to budget transparency and accountability (Tribunal de Contas, 2021[43]). Its updates are presented at the same time as the annual budget, the coverage of expenditure limits is not transparent about the inclusion of capital increases and transfers, and the prospective expenditure path is insufficiently documented (CFP, 2022[44]; Raudla, Douglas and MacCarthaigh, 2022[45]; UTAO, 2022[46]). Furthermore, estimated impacts of policy decisions on the budget are not detailed (UTAO, 2022[47]). The Fiscal Council (CFP) and the Parliamentary Budget Office (UTAO) regularly point to the lack of information and incoherence in budget documentation. The budget administration needs to devote more resources to the provision of timely, transparent and comprehensive information on the draft budget (OECD, 2019[48]). The implementation of medium-term budgeting by programmes, in addition to the current breakdown by economic function, would also help for evaluation and prioritisation and would allow linking medium-term targets to the government’s annual fiscal management (Tribunal de Contas, 2021[43]).

Box 1.4. Spending reviews in Canada and the United Kingdom

Canada’s Policy on Results (2016) prioritised the achievement of better policy outcomes across government by enhancing transparency on the allocation of public resources, including a better use of evidence on performance and systematic spending reviews (OECD, 2019[49]). Spending reviews focused on thematic areas of spending, such as support for innovation and management of fixed assets. These reviews apply a results-driven, rather than a fiscally-driven, approach to spending assessment across all levels of government.

The United Kingdom provides an interesting example for linking spending reviews to the mid-term fiscal strategy. Such multi-year spending reviews were introduced in 1998. They usually set capital and current budgets for each ministry for a period of 3-4 years, with the final year of each spending review period becoming the first year of the subsequent one. After the publication of a spending review, the Treasury is responsible for overseeing its implementation, including spending controls during the year, and monitoring potential risks (Tryggvadottir, 2022[42]).

Source: OECD (2019[49]), Budgeting and Public Expenditures in OECD Countries 2019, OECD Publishing, Paris; Tryggvadottir, Á. (2022[42]), "OECD Best Practices for Spending Reviews", OECD Journal on Budgeting, vol. 22/1.

Figure 1.14. There is room to improve the structure of public spending

1. Expenditures are deflated by the GDP deflator. Public education and health expenditures are defined according to the COFOG classification. 2. Average gross fixed investment over GDP over 2015-21. The OECD average is unweighted and includes 30 countries (excluding Portugal) and the euro-area average includes 11 countries (excluding Portugal). Economic affairs cover transport, communication, fuel and energy and other industries.

Source: OECD (2023), National Account database and OECD calculations.

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Improving the structure of social expenditures

A review of social expenditures could help to improve their effectiveness and promote more equal opportunities. Social expenditures have grown steadily from 18.6% of GDP in 2000 to 24.6% of GDP in 2022 (OECD, 2023[50]) and are expected to increase further due to population ageing, notably in the areas of healthcare (Chapter 2) and pensions (OECD, 2020[51]; 2021[52]). Moreover, the effects of the COVID-19 pandemic and the energy crisis have exacerbated structural challenges of social protection systems and drawn renewed attention to social safety nets in Portugal and many OECD countries (Cardoso, Vilar and Casquilho-Martins, 2020[53]; Hyee et al., 2020[54]). A strong social safety net should ensure socially acceptable living standards for households that have insufficient labour incomes and do not qualify for other benefits. Such benefits have become an increasingly crucial part of governments’ strategies for stabilising family incomes and relieving acute economic needs (OECD, 2022[55]).

Public expenditures on pensions are set to rise markedly in the coming two decades (Table 1.5). Portugal has a public pay-as-you-go pension scheme and a small voluntary private pension market. Despite a shrinking working-age population, gross and net replacement rates in the main public scheme are expected to remain high, at the expense of high social contributions (Figure 1.15) (OECD, 2021[52]). Over the years, Portugal has implemented a wide range of reforms that improve the sustainability of the pension system: the statutory retirement age increases in line with the evolution of life expectancy and pathways into early retirement have been restricted (OECD, 2019[56]). Yet, the European Commission’s projections foresee continuous increases in the public system deficit up to 2038, before its finances will gradually start improving (EC, 2021[57]). Moreover, following the COVID-19 and the energy crisis, a prolonged period of weak growth, especially via its potential negative impact on employment, could reduce social security contributions, increase unstable jobs and the already high number of older workers eligible to minimum pensions (OECD, 2019[56]) and weigh on fertility (Bravo, 2021[58]; Lopes, 2020[59]).

Figure 1.15. Public expenditures on pensions are set to increase further

Note: 1. Gross replacement rate at retirement in the old-age earnings-related public pension scheme.

Source: EC (2021), The 2021 Ageing Report: Economic and Budgetary Projections for the EU Member States (2019-2070), European Commission.

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Efforts to further strengthen the sustainability of the pension system should ensure maintaining the level of old-age benefits while limiting increases in contributions, as the latter could weigh on employment prospects. This essentially leaves the retirement age as the only remaining margin of adjustment. However, both the statutory and the effective retirement age are above the OECD average (Figure 1.16). The regular retirement age is already indexed to changes in life expectancy, but one option would be to apply the same indexation to the minimum age for early retirement, which is currently set at 60. This would help to improve pension sustainability over the long term as life expectancy rises, while limiting very large pension penalties for those who have to retire early (OECD, 2019[56]). Increasing progressivity in the public pension system could compensate for induced cuts in low pensions that such reforms could generate (OECD, 2021[1]). Moreover, the current design provides little incentive for deferring pensions after the normal retirement age. Reviewing the pace of additional benefit entitlements for each month of postponed retirement could help. Finally, a current pathway to early retirement that allows the long-term unemployed over the age of 62 (or 57 if they have sufficiently long contribution periods) to retire should also be reconsidered as it may disincentivise the reintegration of older workers into the labour market (OECD, 2019[56])

Figure 1.16. The effective and statutory retirement ages are relatively high

Note: 1. The average effective age of labour market exit is defined as the average age of exit from the labour force for workers aged 40 and over. 2. The normal retirement age is the age of eligibility of all pension schemes combined without penalty, based on a full career after labour market entry at age 22.

Source: OECD, Pension at a glance 2021.

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The complexity of Portugal’s social protection system hinders its effectiveness and improvements would allow for better social protection without adding to fiscal costs (EC, 2022[60]). Income inequality as measured by the Gini coefficient is above the average of EU countries and slightly below the OECD average, while relative poverty is close to the EU average (OECD, 2023[61]). Portugal’s main anti-poverty programme, the minimum income benefit (RSI or Rendimento Social de Inserção), which is available to residents above 18-years-old and their dependents, is subject to extensive means-testing and eligibility conditions but modest in terms of benefit values (Arnold and Farinha Rodrigues, 2015[62]; Narazani, Riscado and Wemans, 2022[63])). The RSI tops up recipients’ monthly incomes to a reference income threshold, which was set at around EUR 190 for a single person in 2021-22, at 38% of the poverty threshold. Reforming the RSI, as planned by the 2021-30 Strategy Against Poverty, should be a priority. In particular, increasing the reference income threshold would improve protection against poverty risks. Efforts to increase the take-up of the RSI could also be reinforced as the benefit covered only around 20% of poor households in 2016, well below the OECD average (Hyee et al., 2020[54]). This is due to the low reference income threshold and the complexity of regulations and procedures (EC, 2022[60]). Streamlining and reducing the large number of means-tested benefits in Portugal, establishing a one-stop shop application within the public employment system as done in Austria, simplifying the eligibility criteria, and using data-linking to identify eligible non-applicants can help to improve take-up (OECD, 2020[64]). In addition, a large number of other social and means-tested benefits are directed to vulnerable groups (e.g. Complemento Solidário para idosos, Prestação social para a inclusão, Pensões sociais mínimas, Apoio a pessoas com dependência), often with overlapping entitlement provisions. Streamlining and consolidating them into a simpler system as currently planned could make them more cost effective and render support more accessible for the most vulnerable.

Reducing the fragmentation of the social protection system would help to better link social benefits with active labour market policies and unemployment benefits. Improving the coverage of non-standard workers would help. Workers with non-standard work contracts, notably young people (see below), are poorly covered by conventional social protection. In Portugal, as in Spain and Italy, the estimated probability of receiving social support after a job loss was around 50% lower for former self-employed workers than for workers who were on standard contracts (Immervoll et al., 2022[65]). This is despite unemployment benefits being (conditionally) open to owners of businesses and independent contractors. Indeed, some self-employed workers do not have access, e.g. unincorporated self-employed workers, or those working for more than one client. Moreover, the required contribution period for self-employed workers is twice as long as for employees (OECD, 2021[1]).

Family and child benefits are also comparatively weak (Figure 1.17). As part of a broad family policy framework of parental leave policies, family cash benefits, early childhood education and care provisions, as well as out-of-school-hours support, such policies could support more families’ choices to have (more) children and a greater gender balance (OECD, 2011[66]). Indeed, the current fertility rate is low, at 1.40 children per woman in 2021, compared to 1.59 in the average OECD country (OECD, 2023[67]). Through the combination of the different types of paid leave around childbirth available in Portugal, 23.3 weeks of leave is earmarked exclusively for mothers, which is relatively close to the OECD average of 24.6 weeks. With 22.3 weeks, fathers have a noticeably longer period of earmarked leave than the OECD average (10.4 weeks). The remaining 6.9 weeks of fully shareable leave is below the OECD average of 25.4 weeks (Adema et al., 2023[68]). Though the take-up among men remains low (CES, 2022[69]), it is significantly higher than the OECD average (OECD, 2023[67]).

Yet, broader access to early childhood education and care provision could help parents combine a return to full- or part-time work with ensuring care for their child. Although enrolment in pre-school childcare in Portugal stood at around 93% for 3-5-year-olds in 2020, around half of it occurs in private institutions and enrolment rates in early childhood education and care services for 0-2-year-olds remain much lower, at close to 40% (OECD, 2022[70]). The government has been expanding free access to pre-primary care to low-income households in 2020 and 2021 and plans to roll out free access to all 3-year-olds by 2024-25 (EC, 2022[60]). This should go hand-in-hand with policies to reduce the cost of the mostly private day care centres (Creche) at earlier ages, notably by developing the publicly-funded network of non-profit Creches, as planned in the RRP, as well as expanding vouchers for accessing the private ones for low-income households (CES, 2022[69]) that were launched in 2023. This would allow more women to enter the labour market and support gender equality (Andersen and Nix, 2019[71]) and probably also fertility (OECD, 2011[66]). It could be partly done by reviewing the existing cash benefits system that extends up to age 24 and refocusing it on early childhood.

Figure 1.17. Family and child benefits are low

Note: 1. In 2022, the Childhood Guarantee was created, aimed at children under the age of 18 in a situation of extreme poverty. The benefits would amount to EUR 71 million in 2023. 2. Total in-kind benefits are not necessarily targeted at 0-3-year-olds. In-kind benefits include: child day care; accommodation; home help; and other benefits in kind, such as leisure centres and price reductions for children.

Source: Eurostat (2022), Social protection statistics - family and children benefits.

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Streamlining the tax system

The revenue side of government accounts presents opportunities for improving efficiency and fiscal sustainability. Revising the tax composition can foster economic growth by reducing taxes most harmful to growth and inclusiveness (Johansson et al., 2008[72]; Brys et al., 2016[73]). Tax revenue has increased from 30.9% of GDP in 2000 to 35.8% in 2021, slightly above the OECD average (OECD, 2022[74]). Priority should be given to improving and simplifying the tax system, thus reducing the high compliance costs it imposes, especially on small and medium-sized firms, and broadening the tax base, allowing to potentially reduce statutory tax rates and the relatively high tax wedge on labour income (OECD, 2022[75]), notably for low-income workers (Box 1.5).

The medium-term fiscal strategy should include a revision of special provisions in the tax system. While taxpayers have online access to their prefilled tax declaration, filling tax returns remains lengthier than in most OECD countries (OECD, 2021[1]). Previous Economic Surveys pointed to the need to simplify the tax system by reducing the use of special provisions (tax allowances, credits, exemptions and reduced tax rates), as they make the tax system complex and less transparent and some of them may undermine the green transition (OECD, 2019[38]; 2021[1]; Tribunal de Contas, 2022[34]). Tax expenditures accounted for 6.2% of GDP in foregone tax revenues in 2019, which is high in international comparison, and reforms to broaden the tax base and evaluate whether all tax expenditures are cost-effective and meet their desired objectives should be considered. In fact, of the more than 500 identified tax expenditures, 120 do not appear to have a clear objective (Grupo de Trabalho para o Estudo dos Benefícios Fiscais, 2019[76]). As recommended by the OECD (Table 1.6), Portugal is setting up a unit to regularly monitor and assess tax benefits: it should regularly monitor these through public reports and assess their effects to help to reform the tax system.

Significant scope exists to improve the design of the corporate income tax system (Figure 1.18). A state surtax ranging from 3 to 9% depending on profits, reduced rates for small and medium-sized enterprises depending on their location, as well as municipal surcharges at rates of up to 1.5%, generate complexity for taxpayers (Braz, Manuel Campos and Cabral, 2022[77]). Direct tax withholdings are often too high, resulting in sizeable refund claims in the subsequent year, whose overall volume has exceeded 2% of GDP in the recent past. This entails considerable additional costs for businesses (EC, 2022[60]). Corporate income tax incentives to stimulate investment, R&D (OECD, 2021[78]) and more recently wage increases should be carefully evaluated and phased out if found ineffective. The international experience of payroll-based corporate income tax incentives to stimulate employment or wage increases is mixed. In France, such tax breaks did not have a significant effect, notably on small and young firms that tend to be less affected by the delayed corporate income tax reductions (Bozio, Cottet and Malgouyres, 2018[79]). In addition, there may be a case for reviewing size-contingent tax rates that were extended in 2023, as they may hamper the growth of small firms (Garicano, Lelarge and Van Reenen, 2016[80]).

Similarly, the design of the value added tax (VAT) remains characterised by a sizeable range of goods and services that are taxed at reduced VAT rates or exempt (EC/CASE, 2022[81]). In 2020, the ratio between the actual VAT revenue collected and the revenue that would theoretically be raised if VAT was applied at the standard rate to all final consumption stood at 49%, well below the OECD average of 56% (OECD, 2022[74]). Many goods and services that are taxed at a reduced rate do not appear to significantly contribute to reducing income inequality (Braz and Da Cunha, 2009[82])). For example, the reduced rates on housing maintenance, development and renovation work have a limited impact on employment and tend to benefit the wealthiest households. Moreover, once the recovery in these sectors is confirmed, it would be reasonable to review the reduced rates on hotels and restaurants, which tend to largely benefit the owners of these businesses (Benzarti and Carloni, 2019[83]), and the most affluent households. 10.2778/109823

Figure 1.18. Corporate tax revenues are around average despite a high headline rate

Source: OECD (2022), Corporate Tax Statistics: Fourth Edition.

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In addition, taxes on immovable property and inheritance taxes are relatively low, suggesting potential room for increases (OECD, 2021[1]) (Figure 1.19). The recurrent tax on real estate property (IMI) only accounted for 0.8% of GDP in 2021, its amount depends on the property reference value, the municipality, the household’s characteristics and income. In addition, some new home buyers and properties are exempt. The tax base of the IMI should be reviewed and broadened including by abolishing some of the its numerous exemptions. This should go hand in hand with lower reliance on transaction taxes, which have been found to have negative effects on residential and labour mobility (OECD, 2022[84]). There is also scope to increase the use of environmentally-related taxes (see below).

Figure 1.19. Property taxation could be improved

Property tax revenue as a share of total tax revenues in 2020

Note: 2019 data for Australia, Greece, Japan, New Zealand and the OECD average. Data include taxes paid by households and non-households and include household and non-household real estate.

Source: OECD (2022), Housing Taxation in OECD Countries, OECD Tax Policy Studies, No. 29, OECD Publishing, Paris.

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Table 1.6. Past OECD recommendations on improving fiscal sustainability and effectiveness

Recommendations in past surveys	Actions taken since 2021
Simplify the tax system by reducing the use of special provisions (e.g. tax exemptions, special rates) and ambiguity in the tax language.	Portugal is setting up a unit to regularly monitor and assess tax expenditures. Yet, the temporary CIT reduced rate was extended in 2023. The partial Personal Income Tax exemption for younger workers was reinforced and a new partial Corporate Income Tax Exemption was also created in 2023.
Ensure the transparent and effective implementation of programmes financed with EU funds. Prioritise projects that have the strongest economic and social impact by relying on cost-benefit analysis.	Portugal has started implementing its Recovery and Resilience Plan. Supply-side disruptions, inflation, the size of the planned investments and the ambitious timeline present challenges.
Accelerate the implementation of the 2015 budget reform. Allocate adequate resources for the development of data collection, data interoperability, and analytical capacity.	The Recovery and Resilience Plan foresees the modernisation and simplification of public financial management, notably though the full implementation of the 2015 budget reform.
Duly implement the link between increases in the retirement age and life expectancy gains to continue to ensure the long-term financial sustainability of the pension system. Extend that link to the minimum age of early retirement.	In December 2022, the standard age to access retirement pension in was maintained at 66 years and 4 months in 2024 (as before) in line with life expectancy developments.
Increase the level and coverage of the minimum income benefits.	The Social Support Index (IAS), the reference value for many social support programmes, has been updated by 8.4% in 2023.

Box 1.5. Illustrative fiscal impacts of selected reforms

The potential fiscal impacts of policy recommendations made in this Survey are presented in Table 1.7 below. These estimates do not take into account indirect effects, such as those induced by the positive impact of the reforms on growth and public revenues, and some recommendations are not quantifiable.

Table 1.7. Illustrative fiscal impacts of selected reforms

Reform	Medium-term fiscal impact (savings (+)/ costs (-)) (% of GDP)
Improving public spending efficiency – excluding health spending	0.6
Improving health spending efficiency (Chapter 2)	0.4
Increasing spending on R&D policies, while rebalancing support to SMEs	-0.2
Increasing spending on active labour market policies, including for smaller firms	-0.1
Improving family and children benefits	-0.2
Increasing environmental taxes and associated flanking measures: - Impact on revenues - Additional support to the most vulnerable households and to accelerate investment in green mobility	1.0 -0.9
Strengthening the design of the VAT and CIT systems: - Streamlining reduced rates - Lowering headline rates	1.0 -1.0
Increasing taxes on immovable property while lowering the labour tax wedge: - Increasing taxes on immovable property - Lowering the tax wedge	0.3 -0.3
Total	0.6
Of which expenditure changes	-0.4

Note: These estimates roughly quantify the medium-term annual fiscal impact of selected recommendations in this Survey. They are based on the following assumptions: i) improving public spending efficiency as in OECD (2021) and health spending as the average 2020-60 difference between the reference scenario and the healthy-ageing scenario in EC (2021); ii) an increase in subsidies to business R&D as a share of GDP by 0.2 percentage points and rebalancing existing support by 0.2 percentage points; iii) an increase in active labour market spending as a share of GDP by 0.1 percentage point; iv) an increase of family in kind benefits by 0.2 percentage points; v) an increase in environmental taxation as a share of GDP to the average of the top quintile of the OECD (from 2.6% to 3.6% of GDP), with most of the revenues used to compensate poor households and to invest in electric mobility and public transportation; vi) a reduction of headline VAT and CIT rates financed through the streamlining of reduced rates and exemptions; and vii) an increase of taxes on immovable property by 0.3 percentage points while lowering the tax wedge.

Source: OECD (2021[1]), OECD Economic Surveys Portugal, OECD publishing, Paris; EC (2021[57]), The 2021 Ageing Report: Economic and Budgetary Projections for the EU Member States (2019-2070); and OECD calculations.

Policy reforms for stronger, more inclusive and greener growth

Additional reforms are needed to sustain further increases in employment, productivity and household income. Over the past two decades, Portugal’s GDP growth did not allow for a significant catch-up with the EU or the OECD average (Figure 1.20). In 2021, GDP per capita was around 75% of the OECD average, or a third below the average of Germany and France, levels that are similar to those of the early 2000s. Despite its significant potential for economic catch-up, productivity growth has been slow and declining for the past 25 years. Capital accumulation per worker has substantially declined, including well before the crisis, as for most comparable economies. Multifactor productivity, which is more closely related to innovation, also decelerated and appears low in international perspective. Moreover, in the coming years, the high level of corporate debt, the foreseen slight increase in the unemployment rate and the disruption to the training and education system during the pandemic, as well as higher energy costs, could weigh heavily on corporate investment capacity and productivity.

Figure 1.20. Stronger growth is needed to support gains in living standards

Source: OECD (2023), OECD Economic Outlook: Statistics and Projections (database); OECD (2023), Productivity database.

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According to illustrative OECD simulations, the key recommendations made in this Survey could generate further gains of 2.2% in GDP per capita GDP after 10 years and 4.1% in the long term, mostly through higher productivity growth (Box 1.6). Measures to improve the institutional environment, such as those to ease regulatory barriers, strengthen support for SMEs and improve judicial efficiency, would generate stronger growth, largely through higher productivity growth and investment. Labour market reforms to promote hiring on permanent contracts, reduce labour taxes and increase the provision of early childcare services would help to further reduce long-term unemployment rates.

Boosting productivity growth

Portugal's low productivity growth is tightly related to resource allocation, in particular the increasingly inefficient allocation of jobs to less productive businesses in both the manufacturing and services sectors (Figure 1.21) (OECD, 2019[85]; Dias and Robalo Marques, 2020[86]). Laggard firms, as defined by the least productive firms within a sector, tend to have very low productivity compared to their peers (OECD, 2021[87]). From 2009 to 2015, the reallocation of labour and capital towards the most productive firms slowed markedly. Cumbersome regulations may have been partly to blame, as they tend to hinder firm entry and growth, as well as the flow of resources towards more efficient incumbent firms. Moreover, contrary to previous crises, there has been no acceleration in the exit of lower-productivity firms during the COVID-19 crisis (Banco de Portugal, 2021[88]; Kozeniauskas, Moreira and Santos, 2022[89]).

Box 1.6. Potential impact on growth of the OECD-recommended reforms

The estimated impact of some of the key structural reforms proposed in this Survey is calculated using historical relationships between reforms and growth in OECD countries (Table 1.8). These estimates assume a full and swift implementation of reforms.

Table 1.8. Potential impact of some reforms proposed in this Survey on GDP per capita

	Impact on GDP per capita1 %			Decomposition of the long-term effect1
	After 5 years	After 10 years	Long-term effect	Through employment	Through productivity
Strengthening active labour market policies for small firms (by 0.1% of GDP)	0.2	0.3	0.4	0.1	0.4
Increasing direct R&D support targeted at SMEs (by 0.4% of GDP)2	0.0	0.2	0.4	0.0	0.4
Improving judicial efficiency and contract enforcement2	0.2	0.9	2.0	0.0	2.0
Reviewing regulations in professional services3	0.0	0.1	0.1	0.0	0.1
Rebalancing of contract protection4	0.1	0.2	0.6	0.1	0.5
Increasing property and environmental taxes, while reducing labour taxes5	0.1	0.1	0.1	0.1	0.0
Increasing family benefits in kind by 0.2% of GDP	0.3	0.4	0.4	0.3	0.1
Total impact on GDP per capita	0.9	2.2	4.1	0.6	3.6

1. All figures are rounded to the nearest decimal point. The estimates assume full implementation of the reforms. 2. As in OECD (2021), the estimate for judicial efficiency and contract enforcement corresponds to increasing the Rule of Law indicator from the World Bank “Worldwide Governance Indicators” from 1.14 to 1.4 (the OECD median). 3. Reforms in regulations in regulated professions are assumed to bring the OECD regulatory sub-indicator from 2.4 to 1.3 (the level observed in the Netherlands). 4. Reforms are assumed to bring compensation for unfair dismissals as measured by the OECD Employment Protection Legislation indicator from 20 months to 12.4 months (as in France). 5. Increase in property taxes (0.3% of GDP) and revenues from environmental taxes (0.2% of GDP) are assumed to lower the tax wedge by 0.6 percentage points.

Source: OECD estimates based on based on B. Égert and P. Gal (2017[90]), “The quantification of structural reforms in OECD countries: A new framework”, OECD Journal: Economic Studies, Vol. 2016/1; OECD (2021[1]), OECD Economic Surveys Portugal, OECD publishing, Paris; Guillemette, Y. and D. Turner (2018[91]), “The Long View: Scenarios for the World Economy to 2060”, OECD Economic Policy Papers, No. 22, OECD Publishing, Paris.

Facilitating the reallocation of resources while preventing failures of viable businesses and facilitating corporate restructuring and insolvencies will be necessary to support a shift towards stronger growth. This means supporting lifelong training and boosting innovation, particularly in the digital field (OECD, 2021[1]), and increasing competition on markets that remain protected, for example the retail sector and regulated professions. Portugal’s Recovery and Resilience Plan (Box 1.1) appropriately includes a number of initiatives which can improve employment (boosting digital skills and improving active labour market policies for jobseekers) and productivity growth of domestic firms (supporting their digitalisation, reducing barriers to investment, such as regulatory barriers to entrepreneurship, housing affordability and skill shortages).

Figure 1.21. Productivity gains have trended down until recently

1. 5-year lagged moving average of the growth rate of GDP per hour worked. 2. Business sector services excluding real estate. 3. The figure shows the estimated coefficients of annual dummy variables in a regression of logarithmic variance in labour productivity within industries in France, and within country-industry pairs in a set of reference countries, taking the first year as reference (Desnoyers-James et al., 2019). The dispersion is measured as the ratio of the 9th to the 1st deciles of the distribution of business productivity. The equations are estimated separately for manufacturing and non-financial market services.

Source: OECD (2023), Productivity database; OECD (2019), “Portugal: Productivity”, OECD Insights on Productivity and Business Dynamics, February 2019; Desnoyers-James, I., S. Calligaris, and F. Calvino (2019), “DynEmp and MultiProd: Metadata”, OECD Science, Technology and Industry Working Papers, OECD Publishing, Paris.

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Helping small and innovative firms to grow

The productivity gap of Portuguese businesses relative to other OECD economies is particularly large for micro and small firms (OECD, 2019[85]). Micro and small firms are markedly less productive than larger ones (Figure 1.22). Start-ups and young firms grow slower than in other OECD countries, while employment is concentrated in micro firms and SMEs (OECD, 2019[92]): micro firms (those with up to nine employees) account for 40% of total business employment and those with up to 50 employees for over 60%, significantly more than in most OECD countries. Portugal also counts relatively more self-employed compared to the rest of the OECD. On the other hand, medium-sized and large firms account for only 16% and 24% of employment respectively, below the shares seen in many other OECD countries. While this is partly due to Portugal’s economic structure, small firms also account for relatively high shares of total employment in the manufacturing and knowledge-intensive services sectors.

Figure 1.22. Micro and small firms employ most workers but their productivity is low

1. Business sector excluding financial and insurance activities.

2. Value added per person employed in 2020.

Source: OECD (2023), Structural Statistics on Industry and Services and Business Statistics by Size Class and National account database.

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Portugal has a reasonably supportive regulatory and incentive environment for entrepreneurs, strengthened by recent reforms. Portugal ranks relatively well on the OECD Product Market Regulation (PMR) indicator, which measures regulatory barriers to firm entry and competition, although the detailed sub-indicators point to specific sectors where regulations remain relatively stringent, including some professions and the retail sector (Figure 1.23). Progress has been made in several areas. For example, the Portuguese economy is now one of the most open to foreign investment, the Entrepreneur’s Desk (Balcão do Empreendedor) initiative aims to simplify entrepreneurship and business management by offering a digital single point of contact, and the SIMPLEX programme has progressively cut the administrative burden (OECD, 2020[93]). Nevertheless, there is room to strengthen evidence-based policymaking in Portugal, especially in terms of regulatory impact assessments (OECD, 2021[94]; EC, 2022[60]). The Government of Portugal has recently undertaken a range of key reforms to implement and strengthen regulatory impact assessments (RIA). Although the role of RIA has expanded, they are not yet used in consultations on regulatory proposals with stakeholders and preliminary RIA and RIA could be shared at various stages of consultations, as in Canada (OECD, 2016[95]). Moreover, there is no mandatory requirement for consultation with the general public or for conducting RIAs for primary laws initiated by the parliament. More extensive use of ex post reviews would also help to ensure that existing rules remain up to date and continue to deliver their policy objectives, for example by introducing “in-depth” reviews in particular sectors or policy areas (OECD, 2021[94]; 2023[96]).

Figure 1.23. Product market regulations remain stringent in some sectors

Note: 1. The figure for “OECD best performers” is the average of the five OECD countries with the least distortive regulations. 2. Entry regulations refer to the regulation of new entrants to the profession. 3. Conduct regulations refer to the regulation of the conduct of existing professionals.

Source: OECD (2019), Product Market Regulation indicators.

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Some regulatory settings also do not sufficiently promote competition in important industries that produce intermediate inputs, such as professional services, which can raise costs to firms and hamper growth (Figure 1.23) (OECD, 2021[1]). The reform of regulated professions as part of Portugal’s Recovery and Resilience Plan (RRP) and the ongoing reform licensing requirement are an opportunity to address these barriers. They currently include nationality requirements for owning and practicing in some professional services, protective powers of the regulatory professional bodies and the use of exclusive rights that reserve certain tasks for members of the profession. In 2018, the OECD Competition Assessment of self-regulated professions in Portugal provided recommendations to address these barriers. As stressed in the previous Economic Survey and by the Portuguese Competition Authority, their full implementation should be a priority for policymakers (OECD, 2021[1]; AdC, 2021[97]). In addition, regulatory settings in the area of retail distribution are more restrictive than in most other OECD economies due to relatively strict registration and licencing requirements. Further simplifying procedures by reducing the number of permits, the number of entities involved, shortening procedural deadlines by using more tacit approval and reducing the cost of expanding businesses should contribute to supporting firm growth.

Improving access to finance can support new entrants. Venture capital is a valuable source of investment for innovative start-ups since they have few or tangible assets that can serve as security for obtaining finance (Lassébie et al., 2019[98]). Despite significant improvements in the past, namely through the Venture Capital Funds (e.g. Business Angels) and Co-investment Funds (e.g. 200M), the availability of venture capital financing is low in Portugal (OECD, 2021[1]). In addition, there is a wide gap in the availability of funds between early stage and later stage start-ups, that is significantly larger in Portugal than in other European countries (EIT Digital, 2020[99]) reflecting a lack of later stage financial options for start-ups to scale up.

The weak macroeconomic environment also calls for strengthening the capacity of insolvency systems to absorb the potential coming stream of businesses in difficulties, enable the highest possible number of viable businesses to restructure successfully and contain the associated credit losses. While the average time needed to resolve civil and commercial cases in Portugal has continued to decline and is now close to the EU average (EC, 2022[100]), the estimated duration of insolvency proceedings remains well above the OECD average and the efficiency of administrative and tax courts could improve (OECD, 2021[1]; Bank of Portugal, 2022[11]). As recommended by the OECD (2020[101]), the Recovery and Resilience Plan foresees the creation of digital platforms to dematerialise judicial processes and reduce the administrative burden. It also proposes to undertake a review of the insolvency framework. Further steps could include the full rolling out of specialised courts, as currently 6 out of 23 jurisdictional units do not have specialised courts (Pereira and Wemans, 2022[102]). The use of out-of-court procedures should also be further encouraged to prevent court congestion and fasten procedures. Despite new procedures since 2019 and a temporary pandemic specific regime, their take-up remains low overall. Establishing a unique judicial portal for businesses that provides legal information and advice can increase awareness of available options for restructuring (OECD, 2020[101]). However, there has been significant progress on the implementation of the insolvency regime in 2022, notably to speed up the ranking of creditors affected by the recovery plan and the launch of a public tender for the future system (STEPI+), which will allow for a fully electronic handling of insolvencies.

Another factor holding back productivity growth may be a lack of skills, particularly management skills. Portugal has one of the highest proportions of managers without a secondary diploma and managerial practices in medium-sized and large firms appear to be lagging behind those in other countries (Figure 1.24). As in other OECD countries, these shortcomings have consequences for the allocation of resources, the ability to find appropriate staff, the adoption of new technologies and the development of skills (Baltrunaite, Bovini and Mocetti, 2021[103]). Surveys of management quality and organisational practices among industrial firms show that Portugal is significantly behind in adopting successful organisational delegation practices (Panel B; (Eurofound and Cedefop, 2020[104])).

Weak management practices have repercussions for almost all relevant aspects of firm productivity, as evidenced in firm surveys (Alexandre, Cruz and Portela, 2021[105]; INE, 2018[106]). For example, Portuguese firms with less structured managerial practices make less use of ICT tools and the education of the managers of small firms is positive correlated with greater resilience in the face of recessions, both in terms of value added and employment. This evidence highlights the need for improving human resources management practices and work-based training, especially for managerial positions.

Portugal’s active labour market policies include management training programmes, some of which have been successful at raising employment, productivity and exports (Martins, 2021[107]). Public expenditure on training was 0.16% of GDP in 2020. However, frictions in information sharing appear to prevent small firms from accessing relevant active labour market policies (Custodio, Hansman and Mendes, 2021[108]). Public employment services could therefore increasingly target its efforts at small and medium-sized enterprises, notably by raising awareness about their employment services. Moreover, addressing the current high costs of recruiting staff, for example by developing free targeted recruitment services for SMEs, could lead to increasing job offers (Algan, Crepon and Glover, 2020[109]). More ambitiously, the establishment of local one-stop shops including public employment services for businesses combining training, recruitment and human resources services would provide better guidance to businesses in search of information and support.

Figure 1.24. Management skills have room for improvement

1. Share of managers with less than primary, primary and lower secondary educational attainments.

2. Or latest available year.

3. Firms with more than 50 employees. Scores are a measure of management practices across 5 key areas of management: operations management, performance monitoring, target setting, leadership management and talent management. Scores are scaled from 1 (worst practice) to 5 (best practice).

Source: Eurostat (2023), Education and training (database); Bloom, N.;et al. (2021), "World Management Survey - Manufacturing", https://doi.org/10.7910/DVN/OY6CBK.

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Stimulating technology diffusion and innovation

Stimulating innovation and the development and adoption of digital technologies will be vital to stimulate productivity. Portugal lags behind in R&D investment and the take-up of digital technologies compared to other OECD countries (OECD, 2021[1]; EC, 2022[60]). The growing support to business R&D over the past decade from 0.1% of GDP in 2008 to 0.3% of GDP in 2020 has not yet translated into a significant improvement in Portugal’s innovation performance (Figure 1.25). Wider diffusion of these technologies is also likely to have beneficial consequences for Portuguese exports (Aghion, Bunel and Antonin, 2020[110]).

Figure 1.25. Business R&D intensity is relatively low, despite growing policy support

1. R&D investment, excluding real estate activities, public administration and defence, compulsory social security and education, human health and social work activities, and activities of households as employers. 2. Or latest available year.

Source: OECD (2023), R&D Tax Incentives Database; OECD (2023), Main Science and Technology Indicators Database.

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To foster innovative activities, the government offers generous tax credits to business R&D expenditures and a preferential tax treatment to small firms. This is welcome since small firms are more responsive to tax incentives than larger firms (OECD, 2020[111]). Unused tax credits can be carried forward over eight years, which is particularly important for young innovative firms, that often are unprofitable and do not pay corporate income tax in the first years. In line with past OECD recommendations, the government could consider allowing unused tax credits to be indefinitely carried forward like in Belgium, Italy and the United Kingdom (OECD, 2019[38]). Other options to strengthen support include allowing cash refunds for loss making firms, like in Australia, Canada and France, or reductions from withholding payroll taxes for labour inputs related to R&D. The benefits of such a reform should be weighed up against the associated fiscal cost and its impact regularly monitored ex-post.

In contrast to the strong tax incentives, and despite increases since 2016, direct public support to business R&D remains low by OECD standards (OECD, 2021[1]). In 2019, direct public support was close to 0.04% of GDP (17% of the total Portuguese public support for business R&D), while the OECD average stood at 0.08% of GDP (40% of total public support for business R&D). Direct funding seems particularly important for encouraging basic research (OECD, 2020[111]). Moreover, compared to tax credits, R&D grants are in principle better suited for young and innovative firms, as these firms often lack the financial capacity on which banks often base their decisions to award R&D loans. Furthermore, direct support can be targeted to innovative activities with a high potential for knowledge spillovers. Increasing the share of direct government funds within R&D support would also allow for the maximisation of synergies between different funding sources, including the Portugal-Europe R&I Network (PERIN), and the development of performance-based funding.

Basic research and public-private links are also crucial for the innovation process. The public R&D budget credits have stagnated at a low level since 2010, and a targeted rise in funding allocated to public research would help. Portugal scores below the EU average for public-private scientific co-publications as a percentage of total publications (EC, 2022[60]). Research policy in Portugal has tended to favour academically-oriented research and researchers are not always equipped to engage in co-operative research and innovation activities with business and the public sector (OECD, 2022[112]). The CoLAB scheme targeted at industrial partners could be complemented with structured, formal collaboration between enterprises with little prior R&D experience and polytechnics that tend to focus more on professional knowledge (OECD, 2019[113]). Links between research and industry would also be strengthened by widely circulating toolboxes for public/private partnership agreements and identifying the national major centres of expertise.

Moreover, the broader diffusion of digital technologies could also enhance the efficiency of business processes. Portuguese firms, notably smaller ones, lag behind in adopting information and communication technologies, especially those that are well-suited to small firms, such as cloud computing (Figure 1.26). Though Portugal’s communication infrastructure is well developed with fast and ultrafast broadband connectivity in most areas, in small businesses, a lack of training among managers and employees and poor knowledge of support mechanisms act as a barrier to the take-up of digital technologies (see above). Lowering the high and rapidly increasing costs of broadband and telecommunications use would also ease access for smaller firms (ANACOM, 2022[114]). As recommended in past Surveys, reducing switching costs and lock-in periods for consumers, as well as providing information on the quality of services could spur competition (OECD, 2021[1]). In addition, public support could increase its focus on subsidising the cost of cloud computing and other efficiency-enhancing technologies. The Recovery and Resilience Plan foresees EUR 650 million to support small and medium-sized enterprises and their workers through digital skills training and financial incentives to adopt digital technologies. Combining financial support and technical follow-up could encourage the take-up of digital innovation, as experienced in Germany, Finland and Italy (OECD, 2021[115]).

Figure 1.26. The diffusion of digital technologies is uneven

1. Or latest available year.

2. Average of the five countries where take-up rates for small or large firms are the highest.

3. Small businesses have between 10 and 50 employees, and large businesses have more than 250 employees.

Source: OECD calculations using OECD (2023) ICT Access and Use by Businesses (database).

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Table 1.9. Past OECD recommendations to boost productivity

Recommendations in past surveys	Actions taken since 2021
Remove constraints to consumer mobility across telecommunication providers, for example by restricting the use of loyalty clauses in contracts and providing clearer information on the quality of services.	No action taken.
Accelerate and expand the provision of adequate digital resources to schools and teachers, including regular in-service training on ICT use.	The Recovery and Resilience Plan foresees investments of EUR 666 million for the modernisation of vocational education and training institutions.
Consider introducing a personal training account for adults, with more generous vouchers for low-skilled workers.	An online tool where qualifications and skills obtained are registered has been improved.
Expand the coverage of programmes for small companies to acquire digital training, advisory services and information on security and privacy after a thorough evaluation of their impact.	The Recovery and Resilience Plan foresees investments of EUR 650 million to boost the digitalisation of small companies through training and support to adopt digital technologies.

Enhancing employment and job quality

The labour market has continued to improve over recent years. Participation and employment rates reached historical highs in 2022, including for women (Figure 1.4, Panel A), whose employment rate was around 7 percentage points higher than the OECD average at the end of 2022. The labour market showed resilience at the onset of pandemic and job retention schemes helped to preserve jobs and limit the increase in unemployment in 2020 and 2021 (OECD, 2021[1]). Over 2021, the unemployment rate fell below pre-pandemic levels and in 2022, it had declined to its lowest rate in over two decades, although it started increasing in late 2022, alongside slowing growth. The unemployment rate for young people has declined substantially from its 2013 peak (Figure 1.4, Panel B), alongside increasing rates of tertiary attainment for 25-34-year-olds, which have risen from around 13% in 2000 to almost 48% in 2021. However, the increase in the unemployment rate over 2020 was significantly larger for young people and the unemployment rate only declined to pre-pandemic levels during 2022.

Despite these improvements, labour-market disparities and segmentation between those with permanent and those with temporary contracts continues, limiting job opportunities, particularly for young people. The incidence of temporary contracts has declined, but remains high relative to OECD countries, with around 17% of those employed and 59% of employed 15-24-year-olds on temporary contracts (Figure 1.27, Panels A and B). Disparities also risk growing between high and low-skilled workers. In the past two decades, labour demand has been stronger amongst high-skilled workers, boosting their share of employment (Panel C).

Figure 1.27. Labour-market disparities remain high

1. Refers to dependent employment only.

2. The panel shows the percentage point change in employment shares by skill intensity between 2000Q4 and 2019Q4. High-skilled occupations include jobs classified under the ISCO-88 major groups: legislators, senior officials, and managers, professionals, and technicians and associate professionals. Middle-skilled occupations include clerks, craft and related trades workers, and plant and machine operators and assemblers. Low-skilled occupations include service workers and shop and market sales workers, and elementary occupations.

Source: OECD Labour Force Statistics (database); calculations based on Eurostat, Employment by occupation and economic activity (database); Eurostat, Education and Training (database).

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This trend highlights the importance of lifelong learning to support the reallocation of labour, particularly as on average Portuguese adults have relatively low education levels, with only around 60% having completed at least upper secondary education in 2021. Though qualification levels of young adults and recent graduates have improved rapidly in recent years (OECD, 2022[116]), young people continue to struggle to enter the labour market and obtain good-quality jobs, with the employment rate of recent graduates lower than the European average.

Many employers prefer more flexible temporary contracts rather than regular permanent work contracts (OECD, 2017[117]; 2020[118]). According to OECD indicators, in 2019 the cumulated duration of successive standard fixed-term contracts could not legally exceed 37.5 months on average, while this has fallen to 18 months in France and 24 months in Italy following reforms in 2017 and 2014, respectively. Reducing firms’ ability to use temporary contracts and increasing their costs, as detailed in the Decent Work Agenda, should help to reduce their use (Box 1.7). At the same time, the conditions for individual dismissals of workers on permanent contracts have remained relatively stringent. In particular, compensations for dismissals deemed without a fair cause rank amongst the highest in the OECD and there is a high probability that reinstatement is granted to the worker by courts (OECD, 2020[118]). Lowering the costs of using permanent contracts could be aided by reducing compensation for dismissals, for example by limiting the number of monthly wages that can be granted (20 months) to the level of the French compensation scale after the 2017 reforms (around 12 months). The probability of reinstatement through the judicial system could also be reduced by making the receipt of (ordinary) severance pay conditional on individuals renouncing their right to litigation (OECD, 2017[117]). Easing the procedural requirements for dismissal, which remain high, would also help to narrow the gap with temporary contracts, where no such requirements are set.

Labour market disparities between men and women remain significant, although they appear relatively contained in international comparison (OECD, 2023[119]). In the third quarter of 2022, the employment rate for women was more than 7 percentage points higher than the OECD average but remained five percentage points below the employment rate of males. Portugal’s gender-wage gap was also in line with the OECD average in 2020 (OECD, 2023[119]) and it declined further in 2021 according to administrative data (GEP, 2022[120]). The mandatory reporting of gender-disaggregated pay information for companies with more than 50 employees has improved transparency and made a difference, in part linked to the mandatory follow-ups on the causes and possible remedies to gender gaps. A public awareness campaign and award schemes to promote best practices across companies have supported these policy efforts (OECD, 2021[121]). Yet, further efforts are needed to improve access to good-quality childcare (see above), and women remain underrepresented in positions with higher qualifications and higher pay.

Strengthening skills

Vocational and higher education could do more to support young people in acquiring skills that are in demand and that would allow them to transition more easily into high-quality jobs while ensuring that Portugal has the necessary skills to enable the move towards a more carbon-neutral economy. While graduates generally have good job prospects, there are mismatches between the higher education system’s supply of graduate skills and labour market demands (OECD, 2022[122]). Reforms under the RRP are planned to modernise vocational education and training (VET) programmes based on estimates of future skill and labour market needs. Planned investments in VET facilities across secondary schools with professional courses, vocational schools and professional training centres of the public employment service, valued at EUR 710 million, should help to ensure that the facilities are well-equipped for this updated programme. In addition, prospective students often struggle to find information on the academic requirements and labour market prospects of programmes. The InfoCursos web portal provides numerous data (DGEEC, 2022[123]), but is not well known. It has been complemented by additional web portals on training offers, access to which has improved over recent years. Greater guidance in secondary schools, such as further developing the InfoCursos web portal with information on programmes, labour market outcomes and typical career pathways, could help to inform student choices (OECD, 2022[122]). Planned reforms to better distribute the offering of VET programmes across regions are also expected to help ensure equal opportunities to training.

Low levels of cooperation and mobility between industry and higher education limit the alignment of graduates’ skills and industry demand in Portugal (Suleman and Laranjeiro, 2018[124]). Higher education institutions could be more active in seeking input from employers to guide student choice and updating curricula could also help. Institutions could also provide greater incentives, rewards, and support structures for academic staff to better engage with the private sector. The planned grants for the implementation of joint programmes between higher education institutions, firms and other stakeholders for new postgraduate schools, programmes and alliances could be one step to help to foster greater networks.

Upskilling and reskilling workers who are already in the labour market is another key challenge for both employment and productivity, and vocational and higher education institutions could play a greater role in this context. Alongside strong political willingness to foster the upskilling of the adult population (OECD, 2021[1]), the participation of adults aged over 25 in learning increased from 10.5%, below the EU average in 2019, to 12.9%, above average in 2021 (Eurostat, 2022[125]), yet continued participation and a stronger focus on quality could further boost current low education levels. In the Recovery and Resilience Programme, the planned design of additional VET programmes that focus on adult literacy and the upscaling of the National Plan for Adult Literacy, including more projects and financial support for equipment, staff and participants, worth EUR 225 million should help to support lifelong learning. Higher education institutions could also offer more diversified and flexible study opportunities and design more programmes that meet current and future skill needs (OECD, 2022[122]). Developing a quality label to verify core, common certification standards and centralising all the relevant information about certification processes, as in Austria, could help employers and employees to better assess training providers (OECD, 2021[126]).

Public policies could support higher education institutions to upscale existing innovations in teaching and learning through a national centre or network, mimicking the success of Ireland’s National Forum for the Enhancement of Teaching and Learning in Higher Education (OECD, 2022[122]). In particular, this could help to meet the needs of a more diverse group of learners. Developing study guidance for learners who seek upskilling and reskilling opportunities in higher education through an online platform and counselling services could improve the intermediation between higher education institutions and those looking for opportunities to upskill or reskill. Online career guidance portals are most useful when they provide tailored information and advice, with those seeking reskilling opportunities potentially more interested in learning about shorter education and training programmes that are close to home and in flexible formats (OECD, 2022[112]).

Migration and integration policies could also help to address skill shortages and alleviate pressures from ageing. Over recent years, net migration flows have been positive. The inflow of foreign-born populations has increased since 2013, mostly driven by new immigrants from Brazil and the United Kingdom, with the share of foreign-born residents reaching 6.8% of the population in January 2022 (Eurostat, 223[127]). At the same time, some Portuguese graduates, notably health professionals and ICT specialists, have strong incentives to emigrate to other EU countries. Some steps have been taken towards easing the administrative burden faced by arriving foreign talent (OECD, 2022[128]). Moreover, new rules recognising foreign qualifications simplify the return of emigrants who obtained an education abroad, while facilitating the entry of foreign talent into Portugal (Oliveira, 2022[129]; OECD, 2022[128]). The challenge for the government is to step up efforts to improve the efficiency of the immigration authority and facilitate the hiring of foreign talent (OECD, 2023[130]).

Improving labour market outcomes

Recent policy measures, including increases in the minimum wage and fiscal incentives for firms to raise their average wages, have tried to more actively shape wage developments in a deliberate attempt to increase the wage share of GDP to the EU average (Box 1.7). Since 2015, productivity growth has increased slightly and past minimum wage increases have not coincided with aggregate employment losses. At the same time, policies that mandate wage increases can have potentially negative consequences on the labour market, disproportionately impacting young people and other more vulnerable workers. Such policies should carefully consider both the economic and social effects of wage adjustments, including on those who may lose their jobs, and minimise any potential negative effects on employment, which could increase income inequality, even if wage inequality declines.

At the lower end, wages are shaped by Portugal’s minimum wage. According to negotiations between the government and social partners, the minimum wage will increase from EUR 760 in 2023 to EUR 900 in 2026 (Figure 1.28, Panel A and Box 1.7). This follows several years during which the minimum wage has grown at a faster pace than average wages and over the last decade the share of workers earning the minimum wage has risen (Figure 1.28, Panel B).

Figure 1.28. The minimum wage has often been increasing faster than the average wage

Source: OECD Economic Outlook: Statistics and Projections (database); Database on Minimum Wages and Statistics Portugal (2020), Earnings and working hours survey.

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Minimum wages can be an important tool to protect the standard of living of low-paid workers, but they also risk disincentivising the hiring of low-skill workers, some of which may effectively be priced out of the labour market. At around 66% of the median wage in 2023, Portugal’s minimum wage is high relative to the ratio of around 55% on average across OECD countries (Figure 1.29, Panel A). At the level set in most OECD countries, minimum wage increases, even large ones, have had positive effects on low incomes but no or limited negative effects on employment (Dube, 2019[131]). Yet, the available evidence for Portugal is more mixed. For example, minimum wage increases over 2014-17 were associated with declining employment (Alexandre et al., 2022[132]). Given that SMEs employed around 72% of the labour force in 2019 in Portugal and typically have low profit margins, and that around one quarter of employees earn the minimum wage, attention should be paid to ensuring that increases in labour costs do not deter employers from hiring low-wage workers (Neumark, 2018[133]) or encourage them to use more precarious forms of employment, such as temporary contracts. Indeed, these potential negative effects risk being amplified by the current unfavourable macroeconomic context (OECD, 2022[134]). A thorough analysis and regular evaluation of this policy would help to minimise these risks. This could be completed by a revision of the process of setting minimum wages to include a permanent and independent Commission, mandated to evaluate its potential impact and publish recommendations. As labour costs at the minimum wage are elevated (Figure 1.29, Panel B), the authorities could consider reducing employer social security contributions for low-wage workers if needed to mitigate the impact of the minimum wage increases on labour costs.

Figure 1.29. The planned minimum wage increases will put pressures on labour costs

1. The OECD estimate assumes that the median wage increases in line with the average gross wage projected over 2022-24.

2. The OECD simulations are based on the Tax-Ben model and take into account the Portuguese tax and transfer system of 2021. Labour cost is calculated as the gross minimum wage + employer social security contributions and payroll taxes, including any other mandatory payments to private insurance for health, retirement pensions, etc. Results refer to a single person without children aged 40 and working full-time and full year. Social assistance and housing benefits are available if the relevant eligibility and income conditions are met. Housing benefits are calculated assuming private market rent plus other relevant charges amounting to 20% of the national average wage. Data for 2021 is shown for Greece, Israel, Netherlands, Poland, Portugal and the United States.Source: OECD Economic Outlook: Statistics and Projections (database); OECD Employment database; OECD Tax-Benefit Model (“TaxBEN”) version 2.5.0.

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Collective bargaining agreements negotiated between trade unions and employer organisations are extended under mild criteria to non-participatory firms in the sector (OECD, 2023[135]; 2019[136]). As a result, collective agreements covered 76.6% of workers in 2020 (Centro de Relações Laborais, 2022[137]). However, employer organisations and trade unions are often not representative of the sector to which the agreement is to be extended, as their coverage of SMEs is typically low, and so is union density. Though, in principle, the granting of an extension must consider its effects on labour costs and the reduction in inequality and in-work poverty, the process could be improved (Naumann, 2018[138]). Some ways to help ensure that the effects on all firms are taken into account would be to gradually introduce stricter transparent criteria for trade and employers’ representativeness in the sector of the extension (OECD, 2019[136]) or have an independent body tasked to assess the potential effects of an extension, such as in Finland, France and Germany (OECD, 2017[117]). Otherwise, automatic extensions could adversely impact employment by not considering the economic and financial constraints of small firms.

Box 1.7. Recent labour market reforms

Medium-term agreement for the improvement on incomes, wages and competitiveness

In October 2022, the Government and social partners signed the medium-term agreement for the improvement on incomes, wages and competitiveness (Governo da República Portuguesa, 2022[139]). The key goals of the agreement are to boost the share of wages in GDP from 45.3% in 2019 to at least 48.3% by 2026, in line with the European average and to raise productivity growth to 2% by 2026.

Measures outlined in the Agreement to achieve these goals include:

• Defining the increases in the minimum wage at EUR 760 in 2023, EUR 810 in 2024, EUR 855 in 2025 and EUR 900 in 2026.

• Increasing fiscal incentives for firms. One measure includes increasing tax deductions by 50% of the increase in wage costs for firms that increase average wages by at least 5.1% in 2023, 4.8% in 2024, 4.7% in 2025 and 4.6% in 2026, have collective bargaining agreements less than three years old and reduce the salary range of employees. Another includes fiscal incentives for increases in R&D expenditure and/or on-the-job training.

• Attracting and retaining young workers. This includes increasing the annual benefit of the Youth Personal Income Tax, supporting permanent contracts for salaries over EUR 1320 and extending the Return Programme to encourage young people to return from abroad.

• Supporting workers through non-wage measures. This includes updating income tax brackets to ensure the neutrality of wage increases, improving incentives to return to the labour market and increasing overtime pay.

• Simplifying administrative costs by altering the tax system and simplifying bureaucratic processes.

Decent Work Agenda

The Decent Work Agenda follows the 2019 labour-market reforms, continuing to reduce labour market segmentation and the share of precarious jobs, extending parents’ and caregivers’ rights and the reconciliation of work with family life, improving participation in collective bargaining and updating the legal framework for platform workers (Governo da Repúblico Portuguesa, 2021[140]). The Agenda Measures include:

• Limiting the successive use of temporary contracts, increasing compensation in the event of termination and reinforcing the responsibilities around the use of temporary contracts.

• Defining the sharing of parental leave between mothers and fathers.

• Granting support and incentives to companies with recently concluded or revised collective agreements.

• Presuming the existence of an employment contract for work developed in digital platforms to help increase the labour rights and access to social protection of platform workers.

Source: Governo da República Portuguesa (2021[140]), Principais medidas da Agenda do Trabalho Digno e de Valorização dos Jovens no Mercado de Trabalho; Governo da República Portuguesa (2022[139]), Acordo de médio prazo para a melhoria dos rendimentos, dos salários e da competitividade.

Table 1.10. Past OECD recommendations on labour markets

Recommendations in past surveys	Actions taken since 2021
Increase resources allocated to public employment services to provide individualised support and to reach out to jobseekers, especially the younger ones.	Staff numbers in the public employment service have increased. The Sustainable Employment Commitment plans to increase incentives for firms to hire young people on permanent contracts.
Lower contribution-history thresholds for unemployment benefits. Consider opening unemployment assistance to all registered Jobseekers.	During the pandemic, workers with insufficient contributions were temporarily able to apply.
Develop a general monitoring framework for all training providers.	No action taken.

Supporting the transition towards a green and sustainable economy

Reducing further greenhouse gas emissions and adapting to climate change

Portugal has cut its total GHG emissions by one third during 2005-20, placing the country in the top third of European OECD countries in terms of reductions over this period (Figure 1.30) (OECD, 2023[141]). Portugal has enshrined carbon neutrality in national law in the form of its 2021 Climate Framework Law, which mandates reducing total emissions from 2005 levels by at least 55% by 2030 and 90% by 2050 as well as enhancing carbon sequestration, in line with EU carbon-neutrality objectives. The welcome shift from oil and coal to natural gas and renewable sources in energy production was a major factor behind past achievements.

Figure 1.30. Meeting ambitious 2030 and 2050 GHG targets requires well-defined additional policies

Historic and projected GHG emissions, Mt CO₂ equivalent

Note: LULUCF: land use, land-use change and forestry.

Source: EA (2021), Greenhouse Gas Projections Data Viewer – December.

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However, to meet the ambitious 2050 targets, national projections indicate that additional policies will be needed. All measures under the promising Climate Framework Law should be fully implemented and the 2023 revision of the National Energy and Climate Plan should clarify and elaborate the envisaged measures to reach the 2030 and 2050 targets. The share of renewable energy sources is now higher than in most European countries (Eurostat, 2022[142]) and well above the OECD average (Figure 1.32, Panel B). In 2021, renewables generated 58% of electricity, largely hydro (39%) and wind (41%) and made up 43% of energy consumption for heating and cooling, mostly from biomass and heat pumps. Portugal also closed its last two coal power plants in 2021, two years ahead of schedule. While 67% of emissions are generated from energy use (Figure 1.31), further emission reductions will have to rely on broader decarbonisation efforts and the current plans provide limited details on the additional policies to be implemented (OECD, 2023[141]).

Figure 1.31. Emissions by sector

GHG emissions by source sector, %, 2021

Source: OECD Greenhouse gas emissions (database).

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As part of a broader policy mix, pricing instruments, accompanied by temporary and targeted measures to help households and firms adjust, could be key levers in Portugal’s strategy to mitigate carbon emissions (D’Arcangelo et al., 2022[143]). Channelling some of the potential revenues from carbon taxes back to households can help to cushion losses, particularly for low-income households (Immervoll et al., 2023[144]). Portugal prices carbon emissions in three ways: energy taxes, the EU Emissions Trading Scheme (ETS) and the carbon tax, introduced in 2014. Portugal's average effective carbon rate increased by a third over 2018-21, mainly due to higher EU ETS permit prices. With an average effective carbon rate of EUR 74 per tonne of CO2, in 2021, it ranked in the middle of other OECD European countries (OECD, 2022[145]). The average effective carbon price is above the OECD average and around the OECD EU average in both road transport and all sectors excluding road transport (Figure 1.32). However, carbon prices vary by sectors and fuels meaning that effective carbon rates do not provide a consistent price across the economy (OECD, 2023[141]) and not all are aligned with the social cost of carbon. In 2018, Portugal started to gradually phase out some fuel and carbon tax exemptions, but it suspended the increase in the carbon tax at the end of 2021. Support for fossil fuel consumption through tax expenditures still represented 0.3% of GDP in 2021, excluding the temporary energy support measures (see above). The 2021 Climate Law provides for their phase-out by 2030. In addition, the December-2022 agreement on the EU ETS envisages stricter trading rules, an extended industry coverage (in particular to transport and buildings) and the gradual phase-out the exceptions made to emission-intensive industries.

Adjustments to vehicle taxation and road pricing could help to lower GHG emissions from road transport and improve air quality. Closing the tax gap between diesel and petrol, removing the preferential circulation tax treatment for older vehicles and introducing a NOx component in vehicle taxes, as was recently done by Ireland (OECD, 2021[146]), would help to increase the share of cleaner vehicles (OECD, 2023[141]). The shift to taxes based on road use would also help to offset the decline in fuel tax revenue as the use of electric vehicles becomes more widespread. Portugal has an electronic toll system operating on the motorway network for all vehicles. Toll prices vary according to the distance travelled, the height and number of axles of the vehicle but not their emissions. Improving communication and transparency regarding the use of environmental taxes would help to increase their social acceptance (D’Arcangelo et al., 2022[143]). Progress in improving environmental taxation should be regularly assessed, for example through annual reports, as a step towards broader “Green Budgets” (Marinheiro, Sousa and Pinheiro, 2022[147]).

Figure 1.32. Carbon tax rates vary across sectors

Average net effective carbon tax¹, EUR per tCO2, 2021

1. The net effective carbon rate is the net effect of fuel excise taxes, carbon taxes, permit prices and fuel subsidies.

Source: OECD Net Effective Carbon Rates (database).

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Portugal is also reducing transport emissions by extending public transport networks and banning the most polluting vehicles. Public transport is being expanded under the Recovery and Resilience Plan, including extending the Lisbon and Porto metro networks, constructing a light rail system, creating a bus rapid transit system and the purchase of zero-emission buses. However, there are risks that implementation delays continue. Lisbon introduced a low-emission zone in 2011 banning the most polluting vehicles from the city centre during working hours. Yet this has not reduced NOx and PM2.5 concentrations significantly, suggesting the need for stricter standards and stronger enforcement (Santos, Gómez-Losada and Pires, 2019[148]). The political acceptability of vehicle taxation and road pricing policies and the effectiveness of investments in public transport networks can significantly increase if coupled with policies that encourage walking, cycling or using public transport (OECD, 2021[149]; 2022[150]). These policies could include road space reallocation, the mainstreaming of on-demand shared services, and communicating the benefits of transitioning towards sustainable transport systems (OECD, 2021[149]).

While 58% of electricity was produced from renewable sources and renewables accounted for close to a third of primary energy supply in 2021 (Figure 1.33), accelerating the further development of renewable energy and the diversification of energy sources will support a sustainable and stable energy system and reduce import dependency. The large hydropower production capacity is sensitive to climate conditions, which may emerge as a significant risk to the Portuguese electricity sector over the coming decade (IEA, 2021[151]). Portugal plans an increase in pumped storage hydropower to support the development of intermittent sources, such as wind or solar, but also a stable capacity of non-pumped hydropower. Renewable energy electricity generation projects with a capacity greater than 1 MW must be granted a network capacity reserve title (TRC), which can be subject to auctions. Providing a clear agenda for PV auctions, with transparent procedures and bidding options that are advertised well in advance, would help to provide certainty and attract investors as well as lower deployment costs (IEA, 2021[151]; OECD, 2023[141]). While the NECP notes that Portugal has significant wind generation potential to be explored, it does not specify which policies will support increasing onshore wind capacity in line with the 2030 target (IEA, 2021[151]). Additionally, opening the auction processes to all renewable technologies could help to further diversify sources of renewable energy in a cost-efficient way (IEA, 2021[151]; OECD, 2023[141]).

Figure 1.33. The renewable energy share has increased

Note: Total primary energy supply is energy production, plus energy imports, minus energy exports.

Source: OECD Green Growth Indicators Database.

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Boosting energy efficiency, notably in the building sector, would cut energy use while supporting vulnerable households. About 20% of the population are unable to adequately heat their homes in winter and 36% are unable to adequately cool their homes in summer. While Portugal has implemented various policies co-financed by EU funds, the take-up of some instruments is very low and past renovations have failed to deliver significant energy savings (Zangheri et al., 2021[152]). The dispersion of actors, including workers, banks and local administrations, hinders progress (OECD, 2023[141]). A broad reform agenda including regulations, grants and loans to support deep renovation projects could help to address these issues and should also include reforms to some existing schemes (OECD, 2023[141]). Developing local contact points to provide financial and technical support and bringing actors together, such as banks and local administration agencies, as in Germany, could facilitate the process. Portugal could also consider expanding the existing regulatory requirements of energy efficiency to the numerous homeowners over a sufficient timeline, as in Brussels or France, as they currently only apply when selling, renting or renovating a property (OECD, 2023[18]).

Improving waste and water management

Greenhouse gas (GHG) emissions from waste management accounted for 8% of total GHG emissions in 2019 (Figure 1.31). In 2020, Portugal generated more municipal waste per capita than the OECD European average (Figure 1.34, Panel A). Landfilling rates are high, at 54% compared to 27% for the OECD European average, and the rate of circular material use, defined as the share of used material resources from recycled waste, is low, at 2.2% compared to 12.8% in the EU (Eurostat, 2021[153]). At the same time, incentives for reducing waste are insufficient. Landfill tax rates at EUR 22 per tonne in 2021 were only around half of the OECD EU average and will remain below this OECD EU average, despite planned increases to EUR 35 by 2025 (Figure 1.34, Panel B), as stressed in the previous OECD Economic Survey (Table 1.11). Waste charges for households are low and the use of pay-as-you-throw systems are limited (ERSAR, 2022[154]). In 2020, three-quarters of municipalities did not fully recover the costs of waste service provision through tariffs charged to consumers, with waste charges usually linked to water consumption (ERSAR, 2022[154]).

Aligning charges to the amounts of waste collected would encourage behavioural changes (OECD, 2023[141]). Recovering the costs of waste management services is also a prerequisite for financing the sector, as increasing waste treatment capacity and upgrading installations will require about EUR 335 million by 2030 (APA, 2021[155]). Though indexing waste charges to the amounts of waste collected will become mandatory in 2026, there is a need to speed up the implementation of local cost accounting systems for waste management.

Figure 1.34. Waste per capita is above the EU average and incentives for reduction are insufficient

Source: OECD Green Growth Indicators Database; and Confederation of European Waste-to-Energy Plants (CEWEP).

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While Portugal has relatively low water stress at the national level (OECD, 2022[156]), water scarcity is of serious concern in some areas, such as in the Sado and Mira rivers in the Alentejo region and the Algarve River basins and policies could better regulate water demand. Freshwater abstractions per capita are higher than the EU average. In the last 20 years, water availability decreased by about 20% and is expected to fall by a further 10-25% by 2100 (Proença de Oliveira, 2022[157]). Agriculture is the largest user of freshwater, with agricultural abstractions increasing by around 25% since the mid-2010s, particularly in the southern regions (OECD, 2023[141]). Irrigated areas increased by the same order of magnitude. Without policies regulating water demand, investments focusing on the efficiency of irrigation can increase water consumption or accelerate groundwater depletion. The ease of licensing new water abstractions in water-stressed areas, the limited capacity to monitor and fine illegal abstractions and low water abstraction charges for non-potable uses do not encourage water saving and reuse (National Water Council, 2021[158]).

Water pricing that allows for the full recovery of costs will help to finance significant investment needs. The new National Strategic Plan for Water Supply and Wastewater and Rainwater Management (PENSAARP 2030) estimates that around EUR 5.5 billion (2.3% of 2022 GDP) will be needed to maintain water supply, wastewater and rainwater management by 2030, half of which for the maintenance of existing assets to ensure their long-run sustainability (MAAC, 2022[159]). Achieving these maintenance levels would be a significant increase from current levels. In 2020, at least half of municipalities did not recover the costs of water supply services and for 14% of municipalities, data were lacking. For wastewater services, at least two-thirds did not recover costs, with data lacking for 11% (ERSAR, 2022[154]). There is scope to improve the ability of municipalities to assess the costs of wastewater services and increase tariffs, particularly where they provide the service directly (ERSAR, 2022[154]). Achieving full cost recovery will also require better reflecting environmental and resource costs. For example, although rates vary with water scarcity, water abstraction chargers are reduced for irrigation.

Table 1.11. Past OECD recommendations on environmental policies

Recommendations in past surveys	Actions taken since 2021
Accelerate investment in electric mobility and public Transportation, as envisaged in the Recovery and Resilience Plan.	Portugal plans to spend EUR 967 million on public transport in its Recovery and Resilience Plan by 2026.
Once the recovery is firmly established, progressively increase the coverage of the carbon tax, while financially supporting the population in adjusting to greener usages.	The 2022 and 2023 Budget Laws froze the carbon tax rate at its 2021 level.
Ensure the municipalities meet their recycling targets. In the medium term, further increase the landfill tax.	The authorities plan to increase the landfill tax rate to reach EUR 35/tonne in 2025, below the 2021 OECD European average.
Provide the regulatory authority with the necessary tools to impose water tariffs to avoid underpricing.	No action taken.
Increase investment in water infrastructure further and strengthen technical support to municipalities on how to design and implement infrastructure projects, using EU funds.	The investment strategy in the new National Strategic Plan for Water Supply and Wastewater and Rainwater Management involves an estimated increase in water infrastructure of EUR 5.5 billion.

Continuing efforts to reduce corruption

Continuing the efforts to control corruption is important to improve the business environment. Corruption distorts competition, damages investor confidence and diverts the use of public resources from the public interest, besides fostering a sense of mistrust towards public institutions. Transparency International’s Corruption Perceptions Index and the World Bank’s Corruption Control Indicator placed Portugal below the median of OECD countries in 2021 and 2022 (Figure 1.35). A recent survey suggests that 55% of Portuguese firms considered corruption a problem when doing business, above the EU average of 34% (Eurobarometer, 2022[160]). Moreover, business and citizens tend to have low confidence that the police or prosecutors will deal effectively with corruption (Eurobarometer, 2022[160]; 2022[161]).

Progress in the implementation of the national anti-corruption strategy for 2020-24, which aims to improve the levels of prevention, detection and prosecution of corruption, is welcome (OECD, 2021[1]; EC, 2022[162]; FATF, 2022[163]). Overall, the OECD Public Integrity Indicators show that Portugal’s strategic framework has a broad coverage and was elaborated in a relatively participative way, but weaknesses remain in terms of adequacy of implementation structures and evaluation practices (OECD, 2023[164]). The strategy notably foresees measures temporarily banning people who perpetrated crimes of corruption from exercising certain political positions, imposing the adoption of compliance programmes on some entities, extending time limitations for sanctioning some corruption-related crimes and enhancing incentives to provide information on economic crimes. Over the past two years, the transposition of EU regulation to protect whistle-blowers was approved in Parliament, the National Mechanism Against Corruption (MENAC) and the General Regime for the Prevention of Corruption (RGPC) were enacted and an electronic platform for the reporting of MPs’ conflict of interests was launched in September 2022 (Table 1.12). The MENAC also launched a first corruption prevention campaign in early 2023.

Going forward, Portugal should continue strengthening the prosecution mechanism and the capacity of the judicial system to address domestic and foreign corruption cases (Figure 1.36). Portugal has never detected a foreign bribery case through reporting of public officials or auditors’ reports, and detection through suspicious transaction reports and tax authorities is low (FATF, 2022[163]). In the past, the lack of resources for investigation and prosecution of corruption-related offences has been identified as a concern (EC, 2022[162]). In 2022, an increasing number of judges, prosecutors and criminal investigators, as well as experts in economic, financial and other areas were allocated to the courts and to the criminal police. Specialised training for prosecutors should continue to be strengthened. In addition, the Financial Action Task Force (FATF) (2022[163]) still identifies the need to enhance the detection of foreign bribery through Portugal’s financial intelligence unit (Unidade de Informação Financeira) and self-reporting by companies, and to ensure that relevant investigations of foreign bribery are pursued thoroughly and proactively. The statutory fines applicable to legal persons for foreign bribery should also be reviewed to ensure that they are effective, proportionate and dissuasive (FATF, 2022[163]).

Figure 1.35. Corruption is perceived as a challenge

Note: Panel B shows the point estimate and the margin of error. Panel D shows sector-based subcomponents of the “Control of Corruption” indicator by the Varieties of Democracy Project.

Source: Panel A: Transparency International; Panels B & C: World Bank, Worldwide Governance Indicators; Panel D: Varieties of Democracy Project, V-Dem Dataset v12.

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Further measures to improve the accountability and integrity of senior public officials could also help. In particular, the effective prevention and management of conflict of interest should be made stricter, as there have been repeated reports of engagement of high-ranking public officials in the private sector, especially practicing law, while holding office due to the non-exclusive nature of their mandate (Lisi et al., 2022[165]; GRECO, 2022[166]). The Authority for Transparency, which is responsible for assessing compliance by holders of political and high public offices with rules on declarations of interest and assets, is not yet functioning (EC, 2022[162]; GRECO, 2022[166]), but its board of directors has been nominated in January 2023. The introduction of a one-year pilot project of legislative footprint on lobbying during the legislative process is another step forward to ensure transparency in the decision-making process. Such a tool should detail the stakeholders who sought to influence the legislative bills or were consulted in their development. It should further show what inputs into the particular legislative process were submitted and what steps were taken to ensure inclusiveness of stakeholders in the development of the legislation. The legislative footprint should be complemented by a broader mechanism to ensure the transparency of all lobbying activities, in which interest groups would disclose their activities and certain categories of public officials (ministers, members of cabinet, appointed advisors, members of Parliament) would disclose their meetings with interest groups. Rules and codes of conduct on how Members of Parliament engage with lobbyists and other third parties who seek to influence the legislative process should be introduced (OECD, 2021[1]; OECD, 2021[167]).

Figure 1.36. Anti-money laundering efforts need to strengthen further

Note: Panel A summarises the overall assessment on the exchange of information in practice from peer reviews by the Global Forum on Transparency and Exchange of Information for Tax Purposes. Peer reviews assess member jurisdictions' ability to ensure the transparency of their legal entities and arrangements and to co-operate with other tax administrations in accordance with the internationally agreed standard. The figure shows first round results; a second round is ongoing. Panel B shows ratings from the FATF peer reviews of each member to assess levels of implementation of the FATF Recommendations. The ratings reflect the extent to which a country's measures are effective against 11 immediate outcomes. "Investigation and prosecution¹" refers to money laundering. "Investigation and prosecution²" refers to terrorist financing.

Source: OECD Secretariat’s own calculation based on the materials from the Global Forum on Transparency and Exchange of Information for Tax Purposes; and OECD, Financial Action Task Force (FATF).

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Table 1.12. Past OECD recommendations on Anti-Corruption Policies

Recommendations in past surveys	Actions taken since 2021
Continue to enhance the capacity of the Public Prosecution Office to address economic and financial crime, including corruption. Public prosecutors should continue to undertake specialised training in this area.	Prosecutors undertook specialised training in 2021-22, but significant efforts are still needed.
Establish an electronic register of interests for all government members and senior civil servants that is regularly updated.	An electronic platform for the reporting of MPs’ conflict of interests was launched in September 2022.
Introduce codes of conduct on how to engage with lobbyists including a lobbying register.	A one-year pilot project of legislative footprint on lobbying during the legislative process was introduced in November 2021.

Main findings and policy recommendations of the Key Policy Insights Chapter

MAIN FINDINGS	RECOMMENDATIONS (key ones in bold)
Improving macroeconomic policy and fiscal policies
The fiscal stance is estimated to have been broadly neutral in 2022 as the unwinding of COVID-19-related measures was offset by support to households and firms in the face of high inflation. Although some fiscal support to households and firms has been extended in 2023 , fiscal policy is set to tighten.	Tighten the fiscal policy stance, including through increasingly targeting fiscal support towards the most vulnerable households and gradually phasing out energy support measures.
Public debt has been on a declining trend for years and is now below its 2019 level. In light of mounting ageing costs, however, the current debt level remains high, while investments in health, education and infrastructure have been low.	Continue to lower public debt, by developing a medium-term strategy to improve the structure and efficiency of public spending.
Social expenditures have increased rapidly over the years, in contrast to investment in infrastructure, education and health. Heterogenous accounting standards across public entities do not allow for assessing the effectiveness of some policies.	Carry out systematic, regular spending reviews, including in the health sector, to rationalise public expenditures and improve their efficiency. Roll out new accounting standards and develop performance budgeting.
Pension expenditure is high and, despite a link between the standard retirement age and life expectancy, population ageing will put additional pressure on the pension system in the coming decades.	Establish an automatic link between the minimum retirement age and rising life expectancy, similar to the current indexation of the standard retirement age.
The Recovery and Resilience Plan will provide sizeable investment funding but its size and speed are likely to present implementation challenges for the public administration.	Continue to develop administrative capacities to accelerate processes and streamline the public procurement system while ensuring transparency and accountability to prevent risks of fraud.
Numerous tax expenditures reduce public revenues and in some cases the evidence of their effectiveness is weak.	Reduce tax expenditures, notably those that do not target low-income households or substantially raise compliance costs.
A large share of outstanding credit is subject to variable interest rates and rising interest rates are reducing households’ and firms’ debt-servicing abilities. The authorities eased the conditions for mortgage restructuring and introduced interest rate subsidies for low-income households.	Closely monitor the quality of bank credit and the impact of the measures to reduce debt service costs for low-income households.
The social safety net is fragmented and some programmes have low benefit take-up. The government plans to streamline social benefits.	Consolidate the different support programmes for low-income households and simplify eligibility conditions, while considering an overall increase in the level and coverage of minimum income benefits. Permanently expand social protection to non-standard workers.
Difficulties in access to childcare at an early age can be a challenge for low-income households and may hold back female labour participation.	Continue todevelop additional good-quality childcare services for low-income households and neighbourhoods.
Boosting employment and productivity
The use of temporary labour contracts remains high and they are often used for relatively long periods, while costly legal processes add to the cost of hiring on permanent contracts.	Enhance the balance of protection across contract types by continuing efforts to promote the use of permanent contracts and reducing the cost of dismissals.
The minimum wage as a share of the median wage is among the highest in the OECD, and planned increases will further add to labour costs.	Closely monitor the effects of the minimum wage on employment. Reduce employer social security contribution for low-wage workers to mitigate the impact of labour cost increases.
Upskilling and reskilling will be key to continue to boost workers’ skills and productivity.	Better align the supply and demand of skills to current and future labour market needs, while improving counselling to guide students’ study choices and adults’ reskilling and upskilling decisions.
A large share of small firms has weak management and human resources.	Strengthen active labour market policies targeting smaller firms, such as pre-screening programmes for job vacancies by public employment agencies.
Competitive pressures are weak in some sectors. The Recovery and Resilience Plan foresees a review of regulations that remain high in some key professions, such as legal services.	Lower entry barriers, by streamlining regulations, prioritising professional services and the retail sector. Further expand the use of Regulatory Impact Assessments for new regulations and undertake sectoral reviews of existing policies and their competition impact.
Portuguese firms, notably smaller ones, lag behind in terms of adoption of information and communication technologies.	Combine financial support and technical follow-up when rolling out digitalisation programmes.
Direct public support to business R&D is low. Tax incentives are generous, but do not reach young innovative firms.	Reconsider the balance between R&D grants and tax credits and expand direct support.

 

Boosting employment and productivity
Broadband costs and switching costs across operators are high.	Review the lock-in periods for consumers and develop information on quality of broadband packages.
The national anti-corruption strategy has made significant progress, but indicators point to further room for improvement.	Continue efforts to prevent and fight corruption and introduce a permanent lobbying registry.
Lobby activities and potential conflict of interest among members of parliament are not monitored systematically. Rules and codes of conduct on how Members of Parliament engage with lobbyists and other third parties who seek to influence the legislative process have not been introduced.	Introduce codes of conduct on how to engage with lobbyists and other third parties who seek to influence the legislative process, with effective enforcement through the planned Authority for Transparency.
Despite significant progress in insolvency procedures, courts have a large backlog in insolvency cases.	Encourage the use of out-of-court insolvency procedures.
Supporting the transition towards a green and sustainable economy
Details on the additional policies needed to meet ambitious climate targets are limited. The 2021 Climate Framework Law has not yet been implemented.	Swiftly implement the Framework Climate Law. Clarify the measures envisaged to achieve the 2030 goals, quantify their mitigation impact and specify how they will be financed.
Responding to rising energy prices, the government froze planned carbon tax increases at the end of 2021. Carbon prices vary across sectors and fuels.	Gradually increase environmental taxes for sectors outside of the EU Emissions Trading System (ETS), including excise taxes on fuels, while protecting low-income households.
The building stock is in poor condition. Current policies to boost energy efficiency are complex and not fit for purpose.	Accelerate the retrofitting and renovation of buildings, using a mix of regulation, grants and loans.

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